UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  FORM 10-Q   x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2007TRANSITION REPORT PURSUANT TO SECTION 13 OR
 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________
to _________ Commission file number 1-14762  THE SERVICEMASTER COMPANY(Exact name of registrant as specified in its charter)  Delaware

36-3858106(State or other jurisdiction ofincorporation or organization)

(IRS Employer Identification No.)  860 Ridge Lake Boulevard, Memphis, Tennessee 
38120(Address of principal executive offices)
(Zip Code) 901-597-1400
(Registrants telephone number, including area code) Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes o   No
x Indicate by
check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Exchange Act Rule 12b-2. Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x Indicate by
check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o   No
x Indicate the
number of shares outstanding of each of the issuers classes of common stock:
1,000 shares of common stock on August 9, 2007.    TABLE OF CONTENTS

Page
 No.THE
 SERVICEMASTER COMPANY (Registrant) -Part
 I. Financial InformationItem 1:
 Financial Statements (Unaudited)Condensed
Consolidated Statements of
 Operations for the three and six months ended June 30, 2007 and June 30, 2006

3Condensed
Consolidated Statements of
 Financial Position as of June 30, 2007 and December 31, 2006

4Condensed
Consolidated Statements of Cash
 Flows for the six months ended June 30, 2007 and June 30, 2006

5Notes
 to Condensed Consolidated Financial Statements

6Item 2: Management
Discussion and Analysis
 of Financial Condition and Results of Operations

20Item
 3: Quantitative and Qualitative Disclosures About Market Risk

34Item
 4: Controls and Procedures

36Part
 II. Other InformationItem
 1: Legal Proceedings

37Item
 1A: Risk Factors

38Item
 2: Unregistered Sales of Equity Securities and Use of Proceeds

46Item
 4: Submission of Matters to a Vote of Security Holders

46Item
 6: Exhibits

47Signature

482

PART I. FINANCIAL
INFORMATION
THE SERVICEMASTER COMPANYCondensed Consolidated Statements of Operations (Unaudited)(In thousands, except per share
data)

Three Months Ended
 June 30,

Six Months Ended
 June 30,2007

2006

2007

2006Operating Revenue

$
1,026,576

$
1,024,624

$
1,722,471

$
1,687,011Operating Costs and Expenses:Cost of services rendered and products sold


603,425


611,862


1,062,416


1,046,532Selling and administrative expenses


278,422


263,056


480,182


458,876Amortization expense


2,875


3,325


5,706


5,410Restructuring charges


8,260


6,286


15,318


9,838Merger related
expenses


2,794





5,334


Total operating costs and expenses


895,776


884,529


1,568,956


1,520,656Operating Income


130,800


140,095


153,515


166,355Non-operating Expense (Income):Interest expense


13,896


16,093


28,179


30,523Interest and investment income,
 net


(18,118
)

(1,213
)

(26,184
)

(11,549
)Minority interest and other expense, net


1,472


2,074


3,521


4,123Income from Continuing Operations
 before Income Taxes


133,550


123,141


147,999


143,258Provision for income taxes


45,246


48,395


51,067


56,301Income from Continuing Operations


88,304


74,746


96,932


86,957Income (loss) from discontinued
operations, net
 of income taxes


327


2,400


248


(24,124
)Net Income

$
88,631

$
77,146

$
97,180

$
62,833Per Share:Basic Earnings Per Share:Income from continuing operations

$
0.30

$
0.26

$
0.33

$
0. 30Income (loss) from discontinued
operations





0.01





(0.08
)Basic earnings per share

$
0.30

$
0.27

$
0.33

$
0.22Shares


294,872


290,748


293,001


291,146Diluted Earnings Per Share:Income from continuing operations

$
0.29

$
0.25

$
0.33

$
0.29Income (loss) from discontinued
operations





0.01





(0.08
)Diluted earnings per share

$
0.29

$
0.26

$
0.33

$
0.21Shares


304,226


302,728


302,921


295,459See Notes to Condensed Consolidated Financial Statements

3

THE SERVICEMASTER COMPANYCondensed Consolidated Statements of Financial Position
(Unaudited)(In thousands,
except per share data)

As of June 30,
 2007

As of December 31,
 2006AssetsCurrent Assets:Cash and cash
equivalents


$
192,698



$
123,675Marketable securities



114,959




109,992Receivables, less allowance of
$30,489 and
 $26,759, respectively



457,402




407,409Inventories



79,876




69,107Prepaid expenses and other
assets



58,705




25,868Deferred customer acquisition
costs



59,702




37,427Deferred taxes



32,193




37,400Assets of discontinued
operations



301




2,343Total Current Assets



995,836




813,221Property and
Equipment:At cost



432,531




413,810Less: accumulated
depreciation



(255,143
)



(236,602
)Net property
and equipment



177,388




177,208Other Assets:Goodwill



1,674,953




1,648,258Intangible assets, primarily
trade names, net



249,335




249,217Notes receivable



27,982




29,488Long-term marketable
securities



129,114




187,201Other assets



11,055




12,870Total Assets


$
3,265,663



$
3,117,463Liabilities and
Shareholders EquityCurrent
Liabilities:Accounts payable


$
134,471



$
114,533Accrued liabilities:Payroll and
related expenses



106,048




98,425Self-insured
claims and related expenses



96,027




89,398Income taxes
payable



29,408




33,726Other



111,137




111,974Deferred revenues



509,209




442,393Liabilities of discontinued
operations



5,010




7,644Current portion of long-term
debt



20,684




21,549Total Current
Liabilities



1,011,994




919,642Long-Term Debt



634,264




668,873Long-Term
Liabilities:Deferred
taxes



190,440




168,000Liabilities of
discontinued operations



7,935




7,541Other long-term
obligations, primarily
 self-insured claims



164,154




164,549Total Long-Term
Liabilities



362,529




340,090Minority
Interest








100,000Commitments and
ContingenciesShareholders
Equity:Common
 stock $0.01 par value, authorized 1,000,000 shares; issued 328,868 and
 326,168 shares, respectively



3,289




3,262Additional paid-in
capital



1,229,222




1,172,206Retained earnings



345,812




319,459Accumulated other comprehensive
income



12,007




10,118Treasury stock



(333,454
)



(416,187
)Total Shareholders
Equity



1,256,876




1,088,858Total Liabilities and
Shareholders Equity


$
3,265,663



$
3,117,463See Notes to
Condensed Consolidated Financial Statements

4

THE SERVICEMASTER COMPANYCondensed Consolidated Statements of Cash Flows (Unaudited)(In thousands)

Six Months Ended
 June 30,2007

2006Cash and Cash Equivalents at
 January 1


$
123,675



$
114,508Cash Flows from Operating
 Activities from Continuing Operations:Net Income



97,180




62,833Adjustments to
reconcile net income to net cash
 provided from operating activities:(Income) loss
from discontinued operations



(248
)



24,124Depreciation
expense



25,219




22,608Amortization
expense



5,706




5,410Option and
restricted stock expense



3,058




5,482Change in working capital, net
of acquisitions:Receivables



(53,380
)



(81,772
)Inventories and
other current assets



(64,935
)



(67,558
)Accounts
payable



17,995




25,762Deferred
revenues



64,991




48,998Accrued
liabilities



10,504




9,875Change in tax
accounts:Current and
deferred income taxes



34,087




43,962Resolution of
income tax audits








(5,036
)Other,
net



3,633




1,642Net Cash Provided from
 Operating Activities from Continuing Operations



143,810




96,330Cash Flows from Investing
 Activities from Continuing Operations:Property
additions



(24,577
)



(26,267
)Sale of
equipment and other assets



2,420




1,104Business
acquisitions, net of cash acquired



(25,217
)



(100,023
)Notes
receivable, financial investments and
 securities



49,340




(15,765
)Net Cash Provided from (Used
 for) Investing Activities from Continuing Operations



1,966




(140,951
)Cash Flows from Financing
 Activities from Continuing Operations:Borrowings of
debt



415,411




698,108Payments of
debt



(458,404
)



(561,106
)Purchase of
ServiceMaster stock








(44,143
)Shareholders dividends



(70,077
)



(64,075
)Proceeds from
employee share plans



36,277




21,288Net Cash Provided from (Used
for) Financing
 Activities from Continuing Operations



(76,793
)



50,072Cash Flows from
Discontinued Operations:Cash provided
from (used for) operating
 activities



40




(349
)Cash provided
from investing activities








359Net Cash
Provided from
 Discontinued Operations



40




10Cash Increase During the
Period



69,023




5,461Cash and Cash Equivalents at
 June 30


$
192,698



$
119,969See Notes to Condensed Consolidated
Financial Statements

5

THE SERVICEMASTER COMPANYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1: The condensed consolidated financial
statements include the accounts of The ServiceMaster Company and its
subsidiaries, collectively referred to as the Company or ServiceMaster.
Intercompany transactions and balances have been eliminated in consolidation.

Note 2: The condensed consolidated financial
statements have been prepared by the Company in accordance with accounting
principles generally accepted in the United States (GAAP) and pursuant to the
rules and regulations of the Securities and Exchange Commission. The Company
recommends that the quarterly condensed consolidated financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Companys latest Annual Report to Shareholders on Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2006 (2006 Annual Report). The condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary for
the fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. The results of operations for any
interim period are not necessarily indicative of the results which might be
achieved for a full year.

Note 3: On March 18, 2007, ServiceMaster
entered into an Agreement and Plan of Merger (the Merger Agreement) with
ServiceMaster Global Holdings, Inc. (formerly CDRSVM Topco, Inc.) (Holdings)
and CDRSVM Acquisition Co., Inc., an indirect wholly owned subsidiary of Parent
(Acquisition Co.). The Merger Agreement provided that, upon the terms and
subject to the conditions set forth in the Merger Agreement, Acquisition Co.
would merge with and into ServiceMaster, with ServiceMaster as the surviving
corporation of the merger (the Merger). Under the terms of the Merger Agreement,
ServiceMasters shareholders would receive $15.625 in cash for each outstanding
share of common stock of the Company. On June 28, 2007, the Company held a
special meeting of its shareholders to consider and vote on a proposal to
approve the Merger Agreement. Approximately 67 percent of the outstanding
shares entitled to vote at the special meeting, representing approximately 99
percent of votes cast for this proposal, were voted in favor of the Merger
Agreement.

On July 24,
2007 (the Closing Date), the Merger was completed and all of the outstanding
common stock of ServiceMaster was acquired (the Acquisition) by Holdings.
Upon the completion of the Merger, all of the outstanding capital stock of
Holdings, the ultimate parent company of ServiceMaster, was owned by Clayton,
Dubilier & Rice Fund VII, L.P., Clayton, Dubilier & Rice Fund VII (Co-Investment),
L.P., CDR SVM Co-Investor L.P., CD&R Parallel Fund VII, L.P., BAS Capital
Funding Corporation, Banc of America Capital Investors V, L.P., Citigroup
Capital Partners II 2007 Citigroup Investment, L.P., Citigroup Capital Partners
II Employee Master Fund, L.P., Citigroup Capital Partners II Onshore, L.P.,
Citigroup Capital Partners II Cayman Holdings, L.P., CPE Co-Investment
(ServiceMaster) LLC and J.P. Morgan Ventures Corporation, collectively, the
Equity Sponsors.

Upon the
consummation of the Merger, each issued and outstanding share of ServiceMaster
common stock, other than shares held by the Company or Holdings or its
subsidiaries and shares held by stockholders who validly perfected their
appraisal rights under Delaware law, was converted into the right to receive
$15.625 in cash (the Merger Consideration).

Equity
contributions totaling $1,431.1 million from the Equity Sponsors, together with
(i) borrowings under a new $1,150 million unsecured senior interim loan
facility, (ii) borrowings under a new $2,650 million senior secured term loan
facility, and (iii) cash on hand at ServiceMaster, were used, among other
things, to finance the aggregate Merger Consideration, to make payments in
satisfaction of other equity-based interests in ServiceMaster under the Merger
Agreement, to make certain payments with respect to synthetic lease facilities,
to settle existing interest rate swaps, to redeem or provide for the repayment
of certain of the Companys existing indebtedness and to pay related transaction
fees and expenses. In addition, letters of credit issued under a new $150
million pre-funded letter of credit facility (together

6

with the
senior secured term loan facility, the Term Facilities) were used to replace
and/or secure letters of credit previously issued under a ServiceMaster credit
facility that was terminated as of the Closing Date. On the Closing Date, the
Company also entered into, but did not draw under, a new $500 million senior
secured revolving credit facility.

In connection
with the Acquisition, the Merger and the related transactions (the
Transactions), ServiceMaster refinanced certain of its existing indebtedness,
including ServiceMasters $179.0 million, 7.875% notes due August 15, 2009 (the
2009 Notes). On the Closing Date, the 2009 Notes were called for redemption
on August 29, 2007. Additionally, the Company intends to utilize a portion of
the proceeds from the Term Facilities to repay at maturity ServiceMasters
$49.2 million, 6.95% notes due August 15, 2007 (the 2007 Notes).
ServiceMasters existing indebtedness that remains outstanding after the
Transactions and the redemption of the 2009 Notes and repayment of the 2007
Notes includes the $79.5 million, 7.10% notes due March 1, 2018, $195.0
million, 7.45% notes due August 15, 2027, and $82.7 million, 7.25% notes due
March 1, 2038 and certain capital leases and deferred payment obligations.

The Company
incurred certain costs related to the Merger that are presented as Merger
related expenses in the Condensed Consolidated Statements of Operations and
were recorded in the Other Operations and Headquarters business segment. Merger
related expenses totaled $2.8 million pretax ($2.8 million after-tax) for the
second quarter of 2007 and $5.3 million pretax ($4.9 million after-tax) for the
six months ended June 30, 2007. These Merger related costs include fees for a
fairness opinion provided by a third party to the Companys Board of Directors,
as well as legal, proxy solicitation and other professional fees. Additional
Merger related costs are expected to be incurred subsequent to June 30, 2007,
including financial advisor fees and expenses, financing fees, legal and
accounting fees, and other costs.

The Merger
will be accounted for in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, which requires the cost of
the Transactions to be allocated to the assets and liabilities of the Company
based on fair value. Consequently, goodwill, other intangible assets, deferred
revenue and other balances will change significantly from the June 30, 2007
balances as presented in the accompanying Condensed Consolidated Statements of
Financial Position.

Note 4: The 2007 results include restructuring
charges related to the Companys consolidation of its corporate headquarters
into its operations support center in Memphis, Tennessee and the closing of its
headquarters in Downers Grove, Illinois. The transition to Memphis is targeted
to be completed by November 2007. As previously disclosed, the Company expects
to incur incremental costs, including employee retention, severance, recruiting
and related costs, in connection with the corporate headquarters consolidation
plan in the range of $30 to $35 million through the end of 2007. Almost all
such costs will be cash expenditures. In accordance with U.S. GAAP, these costs
are being expensed throughout the transition period. These charges totaled $8.3
million pretax ($5.1 million after-tax) for the three months ended June 30,
2007 and $15.3 million pretax ($9.5 million after-tax) for the six months ended
June 30, 2007. No costs related to the headquarters consolidation were incurred
in the first six months of 2006.

The Company
has change in control severance agreements with certain of its officers. These
agreements generally provide, among other things, for severance pay and other
benefits to the officer if, within two years following a change in control of
ServiceMaster, the officers employment is terminated by the Company other than
for cause or is terminated by the officer for good reason. The completion of
the Merger constitutes a change of control for purposes of these agreements.
The financial results through June 30, 2007 include severance and retention
costs for certain officers in the Companys Downers Grove, Illinois office
whose employment will be terminated due to the consolidation of the corporate
headquarters into the Memphis, Tennessee operations support center. As a result
of the Merger, the Company will record in July 2007 approximately $28 million
of costs related to additional amounts due under the change in control
severance agreements for these officers. These costs are incremental to the

7

costs
described above. The majority of these costs will be paid in the fourth quarter
of 2007 and the first quarter of 2008.

The 2006
restructuring charges related to Project Accelerate, an internal, multi-phase
restructuring project designed to improve the effectiveness and efficiency of
all functional support areas. These charges totaled $6.3 million pretax ($3.8
million after-tax) for the three months ended June 30, 2006 and $9.8 million
pretax ($6.0 million after-tax) for the six months ended June 30, 2006. All the
restructuring costs associated with Project Accelerate were recognized in 2006.

The pretax
charges related to the headquarters consolidation as well as Project Accelerate
are reported in the Restructuring charges line in the Condensed Consolidated
Statements of Operations and are recorded in the Other Operations and
Headquarters business segment.

Note 5: The Company has identified the most
important accounting policies with respect to its financial position and
results of operations. These relate primarily to revenue recognition and the
deferral of customer acquisition costs. The following revenue recognition
policies have not changed since year-end, or since the first six months of
2006. Revenues from lawn care and pest control services, as well as liquid and
fumigation termite applications are recognized as the services are provided.
Revenues from landscaping services are recognized as they are earned based upon
monthly contract arrangements or when services are performed for
non-contractual arrangements. The Company eradicates termites through the use
of baiting systems, as well as through non-baiting methods (e.g., fumigation or
liquid treatments). Termite services using baiting systems, as well as home
warranty services, are frequently sold through annual contracts for a one-time,
upfront payment. Direct costs of these contracts (service costs for termite
contracts and claim costs for warranty contracts) are expensed as incurred. The
Company recognizes revenue over the life of these contracts in proportion to
the expected direct costs. Those costs bear a direct relationship to the
fulfillment of the Companys obligations under the contracts and are
representative of the relative value provided to the customer (the proportional
performance method). Home warranty contract revenue is recognized based on the
expected emergence of total claim costs. The Company regularly reviews its
estimates of direct costs for its termite bait and home warranty contracts and
adjusts the estimates when appropriate. Revenues from the Companys commercial
disaster response and reconstruction projects are recognized using the
percentage of completion method in the ratio that total incurred costs bear to
total estimated costs. Revenues from trade name licensing arrangements are
recognized when earned. The Company has franchise agreements in its TruGreen LawnCare,
Terminix, ServiceMaster Clean, Merry Maids, AmeriSpec and Furniture Medic
businesses. Franchised revenue (which in the aggregate represents approximately
four percent of consolidated revenue) consists principally of monthly fees
based upon the franchisees customer level revenue. Monthly fee revenue is
recognized when the related customer level revenue is reported by the
franchisee and collectibility is assured. Franchise revenue also includes
initial fees resulting from the sale of franchises. These fees are fixed and
are recognized as revenue when collectibility is assured and all material
services or conditions relating to the sale have been substantially performed.
Franchise fee profits comprised nine percent and eight percent of the
consolidated operating income, before headquarters overhead, restructuring
charges and merger related expenses, for the three months ended June 30, 2007
and 2006, respectively. Franchise fee profits comprised 12 percent and 11
percent of the consolidated operating income, before headquarters overhead,
restructuring charges and merger related expenses, for the six months ended
June 30, 2007 and 2006, respectively. The portion of total franchise fee income
related to initial fees received from the sale of franchises was immaterial to
the Companys consolidated financial statements for all periods.

The Company
had $509 million and $442 million of deferred revenue at June 30, 2007 and
December 31, 2006, respectively, which consists primarily of payments received
for annual contracts relating to home warranty, termite baiting, pest control
and lawn care services. The revenue related to these services is recognized
over the contractual period as the direct costs are incurred, such as when the
services are performed or claims are incurred.

8

Customer
acquisition costs, which are incremental and direct costs of obtaining a
customer, are deferred and amortized over the life of the related contract in
proportion to revenue recognized. These costs include sales commissions and direct
selling costs which can be shown to have resulted in a successful sale.

TruGreen
LawnCare has significant seasonality in its business. In the winter and spring,
this business sells a series of lawn applications to customers which are
rendered primarily in March through October (the production season). This
business incurs incremental selling expenses at the beginning of the year that
directly relate to successful sales for which the revenues are recognized in
later quarters. On an interim basis, TruGreen LawnCare defers these incremental
selling expenses, pre-season advertising costs and annual repairs and
maintenance procedures that are performed primarily in the first quarter. These
costs are deferred and recognized in proportion to the contract revenue over
the production season, and are not deferred beyond the calendar year-end. Other
business segments of the Company also defer, on an interim basis, advertising
costs incurred early in the year. These costs are deferred and recognized
approximately in proportion to revenue over the balance of the year, and are
not deferred beyond the calendar year-end.

The cost of
direct-response advertising at Terminix and TruGreen LawnCare, consisting
primarily of direct-mail promotions, is capitalized and amortized over its
expected period of future benefits.

The
preparation of the consolidated financial statements requires management to
make certain estimates and assumptions required under GAAP which may differ
from the actual results. Disclosures in the 2006 Annual Report presented the
significant areas that require the use of managements estimates and discussed
how management formed its judgments. The areas discussed included revenue
recognition; the allowance for uncollectible receivables; accruals for self-insured
retention limits related to medical, workers compensation, auto and general
liability insurance claims; accruals for home warranty and termite damage
claims; the possible outcome of outstanding litigation; accruals for income tax
liabilities as well as deferred tax accounts; the deferral and amortization of
customer acquisition costs; work-in-process balances related to commercial
disaster response and reconstruction projects; useful lives for depreciation
and amortization expense; and the valuation of tangible and intangible assets.
In 2007, there have been no changes in the significant areas that require
estimates or in the underlying methodologies used in determining the amounts of
these associated estimates.

The receivable
balance at June 30, 2007 includes approximately $49 million of InStar
receivables (including approximately $18 million of work-in-process that has
not yet been billed). InStars receivables include hurricane disaster recovery
work performed in New Orleans, southern Florida and other hurricane-affected
areas in late 2005 and 2006. The Company has accounts receivable from customers
that were insured by a family of insurance companies in Florida that are
insolvent, and whose claims are now being administered by the Florida Insurance
Guaranty Association (FIGA). The net receivable balance due from FIGA insured
customers is not material to the Companys consolidated financial statements.
The Company expects that collection of certain of InStars receivables,
potentially including certain of those administered by FIGA, will be
significantly delayed and require or involve litigation. While InStar has a
history of recovering amounts related to its disaster recovery projects, the
current circumstances increase the uncertainties in estimating the amounts
recoverable on certain projects. The consolidated allowance for doubtful
accounts at June 30, 2007 included approximately $8 million related to InStars
accounts receivable. Such allowance reflects managements best estimate of the
amounts that will not be collected. If the estimated amounts recoverable on the
projects change from the amounts currently recorded, these differences will be
recognized as income or loss when the change in estimate is made. Such changes,
if any, would not currently be expected to be material to the Companys
consolidated financial statements.

Note 6: The Company carries insurance policies
on insurable risks at levels which it believes to be appropriate, including
workers compensation, auto and general liability risks. The Company has both
self-insured retention limits and layers of excess insurance coverage above
such self-insured retention

9

limits that is
insured by third parties. The Company is required to pay all claims that fall
below the retention limits. As of June 30, 2007 and 2006, the Company had total
accrued self-insured claims of $158 million and $166 million, respectively.
During the six months ended June 30, the Company recorded provisions for claims
totaling $24 million in 2007 and $28 million in 2006, and the Company paid
claims totaling $32 million in 2007 and $35 million in 2006. The Company uses
historical claims experience and an independent, national actuarial firm to
establish both the current year accrual and the underlying provision for future
losses. The actuarially determined provision and related accrual include
consideration of both known claims, as well as incurred but not reported
claims. The Company adjusts its estimate of accrued self-insured claims when
required to reflect changes based on factors such as changes in health care
costs, accident frequency and claim severity.

Accruals for
warranty claims in the American Home Shield business are made based on the
Companys claims experience and actuarial projections. Termite damage claim
accruals are recorded based on both the historical rates of claims incurred
within a contract year and the cost per claim. Current activity could differ
causing a change in estimates. The Company has certain liabilities with respect
to existing or potential claims, lawsuits, and other proceedings. The Company
accrues for these liabilities when it is probable that future costs will be
incurred and such costs can be reasonably estimated. Any resulting adjustments,
which could be material, are recorded in the period the adjustments are
identified.

Note 7: In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill and intangible assets that are
not amortized are subject to assessment for impairment by applying a fair-value
based test on an annual basis or more frequently if circumstances indicate a
potential impairment. Such circumstances could include actual earnings being
significantly below managements estimates. The Companys annual assessment
date is October 1.

During the
first quarter of 2007, the Company completed the purchase price allocation for
the acquisition of InStar, and goodwill related to this acquisition increased
by approximately $1.1 million, primarily based upon the receipt of additional
information regarding the fair values of certain pre-acquisition contingencies.
The remaining increase in goodwill and intangible assets primarily relates to
tuck-in acquisitions completed by Terminix and TruGreen LawnCare throughout the
first six months of 2007.

The table
below summarizes the goodwill and intangible asset activity and balances:

(In
 thousands)

As of
 December 31,
 2006

Additions

Amorti-zation

As of
 June 30,
 2007Non-amortizable Assets:Goodwill


$
1,648,258



$
26,695



$




$
1,674,953Trade names & other



215,493














215,493Amortizable Assets:Other intangible assets



80,098




5,824









85,922Accumulated amortization(1)



(46,374
)








(5,706
)



(52,080
)Net other intangibles



33,724




5,824




(5,706
)



33,842Total


$
1,897,475



$
32,519



$
(5,706
)


$
1,924,288(1) For the existing
intangible assets, the Company anticipates amortization expense of $11 million
in 2007, declining ratably to approximately $3 million of amortization expense
in 2011.

10

The table below presents goodwill balances by segment:

(In
 thousands)

As of
 June 30,
 2007

As of
 December 31,
 2006TruGreen LawnCare


$
754,261



$
740,249Terminix



715,947




705,870American Home Shield



84,358




86,918Other Operations & Headquarters



120,387




115,221Total


$
1,674,953



$
1,648,258As a result of
the Merger completed on July 24, 2007, the Company will be assigning the Merger
consideration to the tangible assets, intangible assets and goodwill of the
Company based upon an independent valuation performed by a nationally
recognized firm. Consequently, the goodwill and intangible asset balances in
the above tables will change significantly.

Note 8: Prior to June 4, 2007, the Company had
minority investors in Terminix. On June 4, 2007, these minority equity
interests were converted into eight million shares of ServiceMaster common
stock. As a result of this conversion, the minority interest balance in the
Condensed Consolidated Statements of Financial Position was reduced to zero and
eight million shares of ServiceMaster common stock were issued from treasury
stock.

Note 9: Basic
earnings per share are computed by dividing income available to common stockholders
by the weighted-average number of shares outstanding for the period. The
weighted-average common shares for the diluted earnings per share calculation
includes the incremental effect related to outstanding options and stock
appreciation rights (SARS) whose market price is in excess of the grant price.
Shares potentially issuable under convertible securities have been considered
outstanding for purposes of the diluted earnings per share calculations.

In computing diluted earnings per share, the after-tax interest expense
related to convertible securities is added back to net income in the numerator,
while the diluted shares in the denominator include the shares issuable upon
conversion of the securities. On June 4, 2007, the Company converted into eight
million shares of ServiceMaster common stock the minority equity interests of
the minority investors in Terminix. For the 2007 information presented in the
table below, the amounts on the Convertible securities line reflect the
potential dilutive impact of the minority interest until the time of
conversion, while the Shares amounts on the Basic Earnings Per Share line
includes the weighted average impact from the time of conversion of the eight
million ServiceMaster shares.

Shares potentially issuable under convertible securities have been
considered outstanding for the three months and six months ended June 30, 2007
and the three months ended June 30, 2006. For the six months ended June 30,
2006, shares potentially issuable under convertible securities have not been
considered outstanding as their inclusion results in a less dilutive
computation. Had the inclusion of convertible securities not resulted in a less
dilutive computation for the six months ended June 30, 2006, incremental shares
attributable to the assumed conversion of the securities would have increased
shares outstanding by 8.0 million shares and the after-tax interest expense
related to the convertible securities that would have been added to net income
in the numerator would have been $2.4 million.

The table
below reconciles both the numerator and the denominator of the basic earnings
per share from continuing operations computation to the numerator and the
denominator of the diluted earnings per share from continuing operations computation.

11

(In thousands, except per
 share data)

Three Months
 Ended June 30, 2007

Three Months
 Ended June 30, 2006Continuing
Operations:

Income

Shares

EPS

Income

Shares

EPSBasic earnings
per share


$
88,304



294,872


$
0.30



$
74,746



290,748


$
0.26Effect of
dilutive securities, net of tax:Options &
SARS







3,728












3,980Convertible
securities



873



5,626








1,214



8,000Diluted
earnings per share


$
89,177



304,226


$
0.29



$
75,960



302,728


$
0.25(In thousands, except per
share
 data)

Six Months
 Ended June 30, 2007

Six Months
 Ended June 30, 2006Continuing
Operations:

Income

Shares

EPS

Income

Shares

EPSBasic earnings
per share


$
96,932



293,001


$
0.33



$
86,957



291,146


$
0.30Effect of
dilutive securities, net of tax:Options &
SARS







3,113












4,313Convertible
securities



2,107



6,807












Diluted
earnings per share


$
99,039



302,921


$
0.33



$
86,957



295,459


$
0.29Note
10: As of June 30,
2007, the Company maintained a shareholder
approved incentive plan that allows for the issuance of equity-based
compensation awards, including stock options, stock appreciation rights, share
grants, restricted stock awards and restricted stock unit awards. For purposes
of this Note 10, the Companys stock options and stock appreciation rights are
collectively called option(s).

Total
pretax option expense for the three months ended June 30, 2007 and 2006 was
approximately $0.8 million and $1.7 million, respectively, and the income tax
benefits recognized for these awards were approximately $0.3 million and $0.7
million, respectively. For the six months ended June 30, 2007 and 2006, total
pretax option expense was approximately $1.6 million and $3.3 million,
respectively, and the income tax benefits recognized for these awards were
approximately $0.6 million and $1.3 million, respectively. As of June 30, 2007,
there was approximately $5.2 million of unrecognized compensation cost related
to non-vested options. As a result of the Merger, all unrecognized compensation
cost related to non-vested options will be recognized in July 2007.

Total
pretax restricted stock compensation expense for the three months ended June
30, 2007 and 2006 was approximately $0.7 million and $0.8 million respectively,
and the income tax benefits recognized for these awards was approximately $0.3
million and $0.3 million, respectively. For the six months ended June 30, 2007
and 2006, total pretax restricted stock compensation expense was approximately
$1.5 million and $2.1 million, respectively, and the income tax benefits
recognized for these awards were approximately $0.6 million and $0.9 million,
respectively. As of June 30, 2007, there was approximately $7.5 million of
unrecognized compensation cost related to non-vested restricted stock awards.
As a result of the Merger, all unrecognized compensation cost related to
non-vested restricted stock awards will be recognized in July 2007.

The
Company did not issue stock options, stock appreciation rights, share grants,
restricted stock awards or restricted stock unit awards during the six months
ended June 30, 2007.

Note 11: In the Condensed Consolidated
Statements of Cash Flows, the caption Cash and Cash Equivalents includes
investments in short-term, highly-liquid securities having a maturity of three
months or less. Supplemental information relating to the Condensed Consolidated
Statements of Cash Flows for the six months ended June 30, 2007 and 2006 is
presented in the following table:

12

(in
 thousands)
 Cash paid for or (received from):

2007

2006Interest
 expense


$
27,136



$
28,300Interest and
 investment income



(24,747
)



(13,253
)Income
 taxes, net of refunds (1)



17,221




17,765(1)Income tax
payments for the six months ended June 30, 2006 include payments of $5 million
relating to the resolution of the 2003 and 2004 audits.

Cash received from interest
and investment income primarily reflects investment income and gains realized
on the investment portfolio at American Home Shield.

Note 12: Total comprehensive income was $89
million and $76 million for the three months ended June 30, 2007 and 2006,
respectively and $99 million and $64 million for the six months ended June 30,
2007 and 2006, respectively. Total comprehensive income primarily includes net
income, changes in unrealized gains and losses on marketable securities and
foreign currency translation balances.

Note 13: The Company has an agreement to
provide for the ongoing revolving sale of a designated pool of accounts
receivable of TruGreen LawnCare and Terminix to a wholly-owned,
bankruptcy-remote subsidiary, ServiceMaster Funding LLC. ServiceMaster Funding
LLC has entered into an agreement to transfer, on a revolving basis, an
undivided percentage ownership interest in a pool of accounts receivable to
unrelated third-party purchasers. ServiceMaster Funding LLC retains an
undivided percentage interest in the pool of accounts receivable and bad debt
losses for the entire pool are allocated first to this retained interest.
During the six months ended June 30, 2007 and 2006, there were no receivables sold
to third parties under this agreement. However, the Company may sell its
receivables in the future, which would provide an alternative funding source.
The agreement is a 364-day facility that is renewable annually at the option of
ServiceMaster Funding LLC, with a final termination date of July 17, 2012. The
Company may sell up to $70 million of its receivables to these purchasers and
therefore has immediate access to cash proceeds from these sales. The amount of
the eligible receivables varies during the year based on seasonality of the
business and will, at times, limit the amount available to the Company.

Note 14: Total debt was $655 million at June
30, 2007. The Companys 2007 Notes mature on August 15, 2007. This $49.2
million of debt is classified as long-term debt in the Condensed Consolidated
Statements of Financial Position because the Company intends to refinance the
2007 Notes on a long-term basis. The Company has the ability to consummate the
refinancing, when considered necessary. As of June 30, 2007, the Company had
the ability to consummate the refinancing by utilizing its existing revolving
bank credit facility. Upon completion of the Merger, the Company intends to
refinance the 2007 Notes on a long-term basis by utilizing a portion of the proceeds
from the Term Facilities that were entered into as part of the Merger.

As described
in Note 3, on the Closing Date of the Merger, the Company entered into several
new loan and credit agreements. In addition, on the Closing Date, the Companys
2009 Notes were called for redemption on August 29, 2007.

Note 15:
The financial statement caption discontinued operations includes American
Residential Services (ARS) and American Mechanical Services (AMS). The ARS/AMS
operations provide heating, ventilation, air conditioning (HVAC), plumbing and
electrical installation and repair. In the first quarter of 2006, the Company
recorded a $25 million after-tax provision for expected losses on the
disposition of certain ARS/AMS properties. In the third quarter of 2006, the
Company completed the sales of ARS and AMS. As part of the ARS and AMS sale
agreements, the Company continues to be obligated to third parties with respect
to operating leases for which the Company has been released as being the
primary obligor of certain real estate leased and operated by the buyers. The
Companys obligations under these agreements may be limited in terms of time
and or amount, and in some cases, the Company may have recourse against the
buyers for any potential future payments made by the Company. At the present
time,

13

the Company
does not believe it is probable that the buyers will default on their
obligations subject to guarantee. The fair value of the Companys obligations
related to these guarantees is not significant and no liability has been
recorded.

In addition,
the Company has guarantees on certain bonds issued by the divested companies,
primarily performance and license type bonds. The maximum payments the Company
could be required to make if the buyers are unable to fulfill their obligations
is approximately $21 million at June 30, 2007. Approximately 60 percent of the
bonds expire during 2007, with the remaining bonds expiring primarily through
2008. The Company believes that if it were to incur a loss on any individual
bond guarantee, the likelihood of which the Company believes is remote, such
loss would not have a material effect on the Companys business, financial
condition or results of operations.

The operating
results and financial position of discontinued operations are as follows:

Three months ended June 30,(In thousands, except per share data)

2007

2006Operating
 revenue


$




$
199,236Operating
 income


$
528



$
3,961Provision
 for income taxes



201




1,561Income
 from discontinued operations


$
327



$
2,400Per
 diluted share income from discontinued operations


$




$
0.01Six months ended June 30,(In thousands, except per share data)

2007

2006Operating
 revenue


$




$
377,434Operating
 income


$
402



$
1,389Impairment
 charge








(42,000
)Pretax
 income (loss)



402




(40,611
)Provision
 (benefit) for income taxes



154




(16,487
)Income
 (loss) from discontinued operations


$
248



$
(24,124
)Per
 diluted share income (loss) from discontinued operations


$




$
(0.08
)(In thousands)

As of 
 June 30, 2007

As of 
 December 31, 2006Current
 assets


$
301



$
2,343Total
 assets


$
301



$
2,343Current
 liabilities


$
5,010



$
7,644Long-term
 liabilities



7,935




7,541Total
 liabilities


$
12,945



$
15,185The following
table summarizes the activity during the six months ended June 30, 2007 for the
remaining liabilities from discontinued operations. The remaining obligations
primarily relate to long-term self-

14

insurance
claims. The Company believes that the remaining reserves continue to be
adequate and reasonable.

(In thousands)
 
 Balance at
 December 31, 2006
 
 Cash
 Payments
 or Other
 
 Balance at
 June 30,
 2007Liabilities
 from ARS/AMS
 
 
 $
 4,301
 
 
 
 $
 1,927
 
 
 
 $
 2,374Liabilities from other
 discontinued operations
 
 
 
 10,884
 
 
 
 
 313
 
 
 
 
 10,571Total
 liabilities from discontinued operations
 
 
 $
 15,185
 
 
 
 $
 2,240
 
 
 
 $
 12,945Note
16: The Company
adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), on January 1, 2007. As a result of the
adoption of FIN 48, the Company recorded a $0.8 million increase in the
liability for certain tax benefits and a corresponding reduction to the
January 1, 2007 balance of retained earnings. As of June 30, 2007, the Company
has $16.3 million of tax items primarily reflected in state tax returns that
have not been recognized for financial reporting (unrecognized tax benefits).
If recognized, the effective income tax rate would be favorably impacted by
$10.7 million, net of federal and state tax benefits.

It is expected that the
amount of unrecognized tax benefits will change in the next twelve months.
During the second quarter of 2007, $6.6 million ($4.2 million, net of federal
and state tax benefits) of the Companys unrecognized tax benefits were
recognized, resulting from the expiration of statutes of limitation pertaining
to the classification of income on certain state tax returns.

The Company files
consolidated and separate income tax returns in the United States federal
jurisdiction and in many state and foreign jurisdictions. The Company has been
audited by the United States Internal Revenue Service (IRS) through 2005 and is
no longer subject to state and local or foreign income tax examinations by tax
authorities for years before 2001.

In the
ordinary course, the Company is subject to review by domestic and foreign
taxing authorities, including the IRS. As previously disclosed, the U.S.
federal tax returns filed by the Company through the 2005 return have been reviewed
by the IRS. The Company paid $5 million primarily in the first quarter of 2006
relating to the resolution of the 2003 and 2004 audits. In the fourth quarter
of 2006, the IRS completed the audit of the Companys tax return for 2005, with
no adjustments or additional payments. The IRS commenced examinations of the Companys U.S. federal income tax
returns for 2006 and 2007 in the first quarter of 2006 and 2007, respectively,
which are anticipated to be completed by the end of 2007 and 2008,
respectively. At this time, the outcome of these audits is not known and no
significant adjustments have been proposed by the IRS pertaining to these audit
periods. Various state tax authorities are in the process of auditing state
income tax returns of various subsidiaries. Several state audits are at the
appeals level. If state authorities were to prevail with their assessments, the
Company does not anticipate that these adjustments would have a material impact
on the Companys financial position or results of operations.

The
Companys policy is to recognize potential interest and penalties related to
its tax positions within the tax provision. During the three and six months
ended June 30, 2007, the Company recognized interest income of approximately
$0.8 million and $0.7 million, respectively, through the tax provision,
primarily as a result of the expiration of the statute of limitations on
certain tax positions. As of June 30, 2007, the Company had accrued for the
payment of interest and penalties of approximately $3.1 million ($1.9 million,
net of federal and state tax benefits).

Note 17: The business of the Company is
conducted through five reportable segments: TruGreen LawnCare, TruGreen
LandCare, Terminix, American Home Shield and Other Operations and

15

Headquarters.
The TruGreen LawnCare segment provides residential and commercial lawn care
services. The TruGreen LandCare segment provides landscape maintenance services
primarily to commercial customers. The Terminix segment provides termite and
pest control services to residential and commercial customers. The American
Home Shield segment provides home warranties to consumers that cover heating,
ventilation and air conditioning, plumbing and other home systems and
appliances. The Other Operations and Headquarters segment includes InStar
Services Group, a direct provider of commercial disaster response and
reconstruction services as well as the franchised and Company-owned operations
of ServiceMaster Clean, AmeriSpec, Furniture Medic and Merry Maids, which provide
primarily residential disaster restoration, commercial cleaning, carpet and
upholstery cleaning, home inspection services, furniture repair and maid
services. The Other Operations and Headquarters segment also includes the
Companys headquarters operations, which provide various technology, marketing,
finance, legal and other support services to the business units. Segment
information is presented in the following table.

16

(In thousands)

Three Months
 Ended June 30,
  2007

Three Months
 Ended June 30,
 2006

Six Months
 Ended June 30,
 2007

Six Months
 Ended June 30,
 2006Operating Revenue:TruGreen
LawnCare


$
375,548



$
357,430



$
508,220



$
494,694TruGreen
LandCare



112,298




118,932




215,240




217,853Terminix



311,328




307,735




573,500




561,274American Home
Shield



156,040




159,466




281,227




276,396Other
Operations and
 Headquarters



71,362




81,061




144,284




136,794Total Operating Revenue


$
1,026,576



$
1,024,624



$
1,722,471



$
1,687,011Operating Income (Loss)(1):TruGreen
LawnCare


$
72,813



$
63,798



$
61,220



$
60,975TruGreen
LandCare



(2,126
)



(2,589
)



(2,060
)



(4,407
)Terminix



62,589




59,754




107,360




93,216American Home
Shield



20,278




24,465




27,299




33,598Other
Operations and
 Headquarters (a)



(22,754
)



(5,333
)



(40,304
)



(17,027
)Total Operating Income (a)


$
130,800



$
140,095



$
153,515



$
166,355(a)
Total
 Operating Income and the operating (loss) of the Other Operations and
 Headquarters segment include restructuring charges of $8.3 million and $6.3
 million for the three months ended June 30, 2007 and 2006, respectively and
 $15.3 million and $9.8 million for the six months ended June 30, 2007 and
 2006, respectively. In addition, Total Operating Income and the operating
 (loss) of the Other Operations and Headquarters segment include merger
 related expenses of $2.8 million and $5.3 million for the three months and
 six months ended June 30, 2007, respectively.(1)
Presented
 below is a reconciliation of segment operating income to income from
 continuing operations before income taxes.(In thousands)

Three MonthsEnded June 30,
 2007

Three MonthsEnded June 30,
 2006

Six MonthsEnded June 30,
 2007

Six MonthsEnded June 30,
 2006Segment
 Operating Income


$
130,800



$
140,095



$
153,515



$
166,355Non-operating
 expense (income):Interest
expense



13,896




16,093




28,179




30,523Interest and
investment income, net



(18,118
)



(1,213
)



(26,184
)



(11,549
)Minority
interest and other expense, net



1,472




2,074




3,521




4,123Income from
Continuing Operations before Income
 Taxes


$
133,550



$
123,141



$
147,999



$
143,258The Other Operations and
Headquarters segment includes the operations of InStar, ServiceMaster Clean and
Merry Maids, as well as the Companys headquarters function. InStar (acquired
February 28, 2006) reported revenue of $18 million and $32 million for the
three months ended June 30, 2007 and 2006, respectively, and $40 million and
$43 million for the six months ended June 30, 2007 and 2006, respectively.
InStars operating (loss)/income, net of acquisition related amortization
costs, was ($3.3) million and $2.3 million for the three months ended June 30,
2007 and 2006, respectively, and ($5.7) million and $3.4 million for the six
months ended June 30, 2007 and 2006, respectively. The ServiceMaster Clean and
Merry Maids franchise operations reported combined revenue of $52 million and
$47 million for the three months ended June 30, 2007 and 2006, respectively and
$101 million and $90 million for the six months ended June 30, 2007 and 2006,
respectively. The ServiceMaster Clean and Merry Maids franchise operations
reported combined operating income of $15 million and $13

17

million for
the three months ended June 30, 2007 and 2006, respectively, and $29 million
and $26 million for the six months ended June 30, 2007 and 2006, respectively.
(In thousands)

As of
 June 30, 2007

As of
 December 31, 2006Identifiable Assets:TruGreen
LawnCare


$
1,030,958



$
932,584TruGreen
LandCare



98,638




93,575Terminix



943,742




909,984American Home
Shield



566,975




593,293Other Operations &
 Headquarters



625,049




585,684Discontinued
Operations



301




2,343Total Identifiable Assets


$
3,265,663



$
3,117,463(In thousands)

As of
 June 30, 2007

As of
 June 30, 2006Capital Employed: (2)TruGreen
LawnCare


$
915,589



$
899,948TruGreen
LandCare



38,954




42,279Terminix



724,153




645,985American Home
Shield



189,681




230,808American Home
Shield without cash and
 marketable securities (2)



(100,410
)



(73,531
)Other Operations &
 Headquarters



56,091




70,051Discontinued
Operations



(12,644
)



64,068Total Capital Employed


$
1,911,824



$
1,953,139(2)
Capital employed is a
 non-GAAP measure that is defined as the segments total assets less liabilities,
 exclusive of debt balances. The Company believes this information is useful
 to investors in helping them compute return on capital measures and therefore
 better understand the performance of the Companys business segments. The
 calculation of capital employed for the American Home Shield segment includes
 approximately $290 million and $304 million of cash and marketable securities
 at June 30, 2007 and 2006, respectively. The investment income and realized
 gains/losses on these assets are reported below operating income in
 non-operating income/expense. In order to facilitate the comparison of return
 on invested capital for the American Home Shield segment, the Company has
 also presented capital employed for this segment excluding cash and marketable
 securities. The negative capital employed balances primarily result from
 deferred revenue and amounts payable to subcontractors. Presented below is a
 reconciliation of total segment capital employed to the most comparable GAAP
 measure.(In thousands)

As of
 June 30, 2007

As of
 June 30, 2006Total Assets


$
3,265,663



$
3,329,115Less:Current liabilities, excluding current portion of 
 long-term debt



991,310




1,072,705Long-term liabilities



362,529




303,271Total Capital Employed


$
1,911,824



$
1,953,13918

Note 18: In the ordinary course of conducting
its business activities, the Company becomes involved in judicial,
administrative and regulatory proceedings involving both private parties and
governmental authorities. These proceedings include general and commercial
liability actions and a small number of environmental proceedings. The Company
does not expect any of these proceedings to have a material adverse effect on
its financial position, annual results of operations or liquidity.

Class
Action suits brought against the Company and CD&RFollowing the
announcement of the proposed acquisition of ServiceMaster by CD&R, five (5)
complaints were filed against ServiceMaster concerning the proposed merger:
Kaiman v. Spainhour, et al. (filed in Chancery Court in Memphis, Tennessee)
(Kaiman); Golombuski v. The ServiceMaster Co., et al. (filed in Circuit Court
in Memphis, Tennessee) (Golombuski); Sokol and Bowen v. The ServiceMaster
Co., et al. (filed in Circuit Court in Memphis, Tennessee) (Sokol); Palmer v.
The ServiceMaster Co., et al. (filed in Cook County Circuit Court in Chicago,
Illinois) (Palmer); and Smith v. The ServiceMaster Co., et al. (filed in
Chancery Court for Newcastle County, Delaware) (Smith).

All of the
complaints name ServiceMaster, its CEO and its Board of Directors as
defendants. The Kaiman, Golombuski and Smith complaints additionally name
CD&R as a defendant and the Smith complaint also names the investors in
CDRSVM Topco, Inc., CDRSVM Topco, Inc. and Acquisition Co. All of the
complaints allege breach of fiduciary duties and seek injunctive relief. The
Kaiman complaint also contains a specific count seeking indemnification of
costs. The Golombuski and Smith complaints also allege that CD&R aided and
abetted the individual defendants breach of fiduciary duties, while the Kaiman
complaint generally alleges that defendants breached their fiduciary duties
or aided and abetted a breach of fiduciary duty. The Smith complaint also
alleges that there are material omissions in the preliminary proxy statement
relating to the proposed acquisition that the Company filed with the SEC on
April 16, 2007. All five of the complaints challenged and indicated an intent
to enjoin the proposed acquisition of ServiceMaster.

After the
plaintiff in the Smith case filed a motion for expedited discovery and for the
scheduling of a preliminary injunction hearing, the parties to the Smith case
reached an agreement in principle to settle that case on a class wide basis and
entered into a Memorandum of Understanding reflecting that agreement. The
Memorandum of Understanding provides, among other things, for ServiceMaster to
include certain additional disclosures in the final Proxy Statement with
respect to the proposed merger (subsequently made) and for a reduction of the
Company termination fee from $100 million to $90.8 million (subsequently made).
The parties are negotiating a definitive Stipulation of Settlement, which
requires confirmatory discovery to be completed by the plaintiffs and the
approval of the Delaware Court.

Notwithstanding
the settlement agreement reached in the Smith case, the plaintiffs in the other
four pending actions nonetheless attempted to pursue those actions. The Kaiman,
Golombuski and Sokol complaints were consolidated, and the Tennessee court
handling those cases entered an order denying the plaintiffs motion for
expedited discovery and granting a stay of these actions pending the resolution
of the Smith case in Delaware. The Illinois court handling the Palmer case
denied the plaintiffs motion for expedited discovery and dismissed the
complaint on the basis of the pending settlement in Delaware. The plaintiff in
Palmer has taken an appeal from that dismissal.

The Company
believes that the settlement agreement with respect to the Smith case should
resolve all of the foregoing litigation. Notwithstanding the settlement, the
Company believes the various litigation to be without merit and, if the settlement
is not fully consummated for any reason, intends to defend them vigorously.

19

MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

MERGER AGREEMENT

On March 18,
2007, ServiceMaster entered into an Agreement and Plan of Merger (the Merger
Agreement) with ServiceMaster Global Holdings, Inc. (formerly CDRSVM Topco,
Inc.) (Holdings) and CDRSVM Acquisition Co., Inc., an indirect wholly owned
subsidiary of Parent (Acquisition Co.). The Merger Agreement provided that,
upon the terms and subject to the conditions set forth in the Merger Agreement,
Acquisition Co. would merge with and into ServiceMaster, with ServiceMaster as
the surviving corporation of the merger (the Merger). Under the terms of the Merger Agreement, ServiceMasters
shareholders would receive $15.625 in cash for each outstanding share of common
stock of the Company. On June 28, 2007, the Company held a special meeting of
its shareholders to consider and vote on a proposal to approve the Merger
Agreement. Approximately 67 percent of the outstanding shares entitled to vote
at the special meeting, representing approximately 99 percent of votes cast for
this proposal, were voted in favor of the Merger Agreement.

On July 24, 2007 (the
Closing Date), the Merger was completed and all of the outstanding common
stock of ServiceMaster was acquired (the Acquisition) by Holdings. Upon
the completion of the Merger, all of the outstanding capital stock of Holdings,
the ultimate parent company of ServiceMaster, was owned by Clayton, Dubilier
& Rice Fund VII, L.P., Clayton, Dubilier & Rice Fund VII
(Co-Investment), L.P., CDR SVM Co-Investor L.P., CD&R Parallel Fund VII,
L.P., BAS Capital Funding Corporation, Banc of America Capital Investors V,
L.P., Citigroup Capital Partners II 2007 Citigroup Investment, L.P., Citigroup
Capital Partners II Employee Master Fund, L.P., Citigroup Capital Partners II
Onshore, L.P., Citigroup Capital Partners II Cayman Holdings, L.P., CPE
Co-Investment (ServiceMaster) LLC and J.P. Morgan Ventures Corporation,
collectively, the Equity Sponsors.

Upon the
consummation of the Merger, each issued and outstanding share of ServiceMaster
common stock, other than shares held by the Company or Holdings or its
subsidiaries and shares held by stockholders who validly perfected their
appraisal rights under Delaware law, was converted into the right to receive
$15.625 in cash (the Merger Consideration).

Equity contributions
totaling $1,431.1 million from the Equity Sponsors, together with
(i) borrowings under a new $1,150 million unsecured senior interim loan
facility (Interim Loan Facility), (ii) borrowings under a new $2,650 million
senior secured term loan facility, and (iii) cash on hand at
ServiceMaster, were used, among other things, to finance the aggregate Merger
Consideration, to make payments in satisfaction of other equity-based interests
in ServiceMaster under the Merger Agreement, to make certain payments with
respect to synthetic lease facilities, to settle existing interest rate swaps,
to redeem or provide for the repayment of certain of the Companys existing
indebtedness and to pay related transaction fees and expenses. In addition,
letters of credit issued under a new $150 million pre-funded letter of credit
facility (together with the senior secured term loan facility, the Term
Facilities) were used to replace and/or secure letters of credit previously
issued under a ServiceMaster credit facility that was terminated as of the
Closing Date. On the Closing Date, the Company also entered into, but did not
draw under, a new $500 million senior secured revolving credit facility.

In connection with the
Acquisition, the Merger and the related transactions (the Transactions),
ServiceMaster refinanced certain of its existing indebtedness, including
ServiceMasters $179.0 million, 7.875% notes due August 15, 2009 (the 2009
Notes). On the Closing Date, the 2009 Notes were called for redemption on
August 29, 2007. Additionally, the Company intends to utilize a portion of the
proceeds from the Term Facilities to repay at maturity ServiceMasters $49.2
million, 6.95% notes due August 15, 2007 (the 2007 Notes). ServiceMasters
existing indebtedness that remains outstanding after the Transactions and the
redemption of the 2009 Notes and repayment of the 2007 Notes includes

20

the $79.5 million, 7.10%
notes due March 1, 2018, $195.0 million, 7.45% notes due August 15, 2027, and
$82.7 million, 7.25% notes due March 1, 2038 and certain capital leases and
deferred payment obligations.

The Company incurred merger
related costs totaling $2.8 million and $5.3 million for the three months and
six months ended June 30, 2007, respectively. The Company has separately
presented these costs in the Condensed Consolidated Statements of Operations.

RESULTS OF OPERATIONS

SECOND QUARTER 2007
COMPARED TO 2006

The Company
reported second quarter 2007 revenue of $1.0 billion, comparable to 2006. Total
diluted earnings per share (i.e., from both continuing operations and
discontinued operations) were $0.29 compared to $0.26 in 2006. Diluted earnings
per share from continuing operations only were $0.29, compared with $0.25 in
2006. Income from continuing operations totaled $88.3 million in 2007 compared
to $74.7 million in 2006. As more fully described below, the 2007 results
include restructuring charges and merger related expenses totaling $11.1
million pretax ($7.9 million after-tax), and the 2006 results include
restructuring charges of $6.3 million pretax ($3.8 million after-tax).
Operating income for the second quarter was $131 million compared to $140
million in the prior year. The current year results included $5 million more of
restructuring charges and merger related costs. The change in operating income
also primarily reflects profit increases in the TruGreen LawnCare and Terminix
operations, offset by lower profits at InStar and American Home Shield and a $5
million increase in compensation expense related to an employee deferred
compensation trust for which there is a corresponding and offsetting increase
in investment income within non-operating expense/(income).

In the second quarter of
2007, the Company recognized $8.3 million of restructuring charges.
These charges primarily reflect accruals for future payments related to the
Companys consolidation of its corporate headquarters into its operations
support center in Memphis, Tennessee and closing of its headquarters in Downers
Grove, Illinois. The transition
to Memphis is targeted to be completed by November 2007. During the
second quarter of 2007, the Company also incurred merger related expenses
totaling $2.8 million. These merger related costs included legal, proxy
solicitation and other professional fees. The 2006 second quarter results
included a $6.3 million restructuring charge related to Project Accelerate, an internal, multi-phase restructuring project designed to
improve
the effectiveness and efficiency of all functional support areas. All the
restructuring costs associated with Project Accelerate were recognized entirely
in 2006.

Cost of
services rendered and products sold decreased one percent in the second
quarter. As a percentage of revenue, these costs decreased to 58.8 percent in
2007 from 59.7 percent in 2006, due in part to the favorable leveraging of
costs within the TruGreen LawnCare operations resulting from an increased
volume of production. Selling and administrative expenses increased six percent
in the second quarter. As a percentage of revenue, these costs increased to
27.1 percent in 2007 from 25.7 percent in 2006, primarily reflecting the
increase in compensation expense related to an employee deferred compensation
trust for which there is a corresponding and offsetting increase in investment
income within non-operating expense/(income), as well as higher sales and
marketing expenses at American Home Shield associated in part with its new
contract with the Realogy brands.

Second quarter
non-operating items totaled $2.8 million of income for 2007 compared with $17.0
million of expense in 2006. This change primarily reflects $12 million more of
investment gains and income realized from the American Home Shield investment
portfolio, $5 million more investment income related to the employee deferred
compensation trust discussed above (for which there is a corresponding and
offsetting charge against operating income), as well as a reduced level of
interest expense.

21

The effective
tax rate from continuing operations for the three months ended June 30 was 34
percent in 2007 and 39 percent in 2006. The 2007 effective tax rate was
impacted by a $4 million reduction in tax expense resulting from the favorable
resolution of state tax items related to a prior non-recurring transaction, as
well as a $3 million reduction in tax expense resulting from incremental
deferred tax benefits that became recognizable during the second quarter of
2007 upon the conversion of the minority equity interests in Terminix into
eight million shares of ServiceMaster common stock.

Segment
Reviews for the Second Quarter 2007 Compared to 2006

The following business segment reviews should
be read in conjunction with the required footnote disclosures presented in the Notes
to the Condensed Consolidated Financial Statements. This disclosure provides a
reconciliation of segment operating income to income from continuing operations
before income taxes, with net non-operating expenses as the only reconciling
item. The Companys business segment reviews include discussions of capital
employed, which is a
non-GAAP measure that is defined as the segments total assets less liabilities, exclusive of debt balances. The
Company believes this information is useful to investors in helping them
compute return on capital measures and therefore better understand the
performance of the Companys business segments. The Notes to the Condensed Consolidated Financial Statements also include a
reconciliation of segment capital employed to its most comparable GAAP measure.

The TruGreen
LawnCare segment, which provides lawn care services to residential and
commercial customers, reported revenues of $376 million compared to $357
million in 2006. The segment reported second quarter operating income of $73
million compared to $64 million in 2006. The growth in revenue and operating
income was supported by an increase in lawn service applications completed in
the second quarter, as well as improved price realization.Full program customer
counts increased one percent, as continued strong improvements in retention
helped offset a decline in new sales, which were adversely impacted by poor
April weather. As
previously disclosed in the Companys first quarter Form 10-Q filing, the
completion of first quarter lawn service applications was delayed this year due
to late season snowfall in the Midwest and Northeast portions of the
country. These delayed applications were completed in the second quarter,
resulting in an increased level of second quarter lawn service applications
this year. With respect to overall
pricing, the lawn care operations realized an improvement in average prices of
approximately three percent. Second quarter operating income of the lawn
care operations increased $9 million primarily reflecting the increased volume
of lawn service applications and the resulting favorable leveraging of fixed
costs. Capital
employed in the TruGreen LawnCare segment increased two percent, primarily
reflecting the impact of tuck-in acquisitions.

The TruGreen
LandCare segment, which provides landscape maintenance services primarily to
commercial customers, reported a six percent decrease in second quarter revenue
to $112 million, compared to $119 million in 2006, and a reduced operating loss
of ($2.1) million, compared to an operating loss of ($2.6) million in 2006.
Base contract maintenance revenue decreased five percent and enhancement
revenue (e.g., add-on services such as seasonal flower plantings, mulching,
etc.) decreased eight percent in the second quarter. These revenue declines
reflect the near-term impacts of the Companys efforts to improve its customer
base with a better customer mix by pruning less profitable jobs, implementing
stricter pricing on new sales, and increasing the average size of new proposals
and sales. Despite a decrease in total base maintenance contract sales dollars
during the second quarter, the Company realized a meaningful improvement in the
average value per contract sold (higher value contracts tend to be more
profitable). The level of operating loss improved in the second quarter
primarily reflecting increased profit margins on the base contract maintenance
portfolio supported by improved labor and materials management.Capital
employed in the TruGreen LandCare segment totaled $39 million, approximately $3
million lower than the prior year.

The Terminix
segment, which includes termite and pest control services, reported a one
percent increase in overall second quarter revenue to $311 million, compared to
$308 million in 2006. Operating income increased five percent to $63 million
compared to $60 million in 2006. Terminixs overall revenue

22

growth for the
second quarter reflected strong growth in pest control services and an increase
in termite contract renewals, offset in part by a double-digit decrease in
revenue from initial termite treatments. Revenue from pest control services,
which represent approximately one-half of the annual revenues of the Terminix
segment, increased nine percent in the second quarter, reflecting the impact of
acquisitions and an improvement in retention, which more than offset a
decline in unit sales during the quarter. Revenue from termite contract
renewals increased five percent in the second quarter, supported by improved
retention. Revenue from initial termite applications (termite completions)
declined 13 percent in the second quarter as a result of a weak annual termite
swarm season, which was adversely impacted by cooler than normal weather
conditions. Second quarter operating income increased $3 million, primarily
reflecting management of seasonal staffing of sales labor, reduced overhead
spending, and lower termite materials costs. Capital employed in the Terminix segment
increased 12 percent, reflecting the impact of tuck-in acquisitions.

The American
Home Shield segment, which provides home warranties to consumers that cover
heating, ventilation and air conditioning (HVAC), plumbing and other home
systems and appliances, reported a two percent decrease in revenue to $156
million compared to $159 million in 2006 and operating income of $20 million in
2007 compared to $24 million in 2006. The decline in revenue resulted from
lower contract costs in the quarter due to differences between years in the
incidence of warranty claims that are currently expected to be timing in
nature. The Company recognizes revenue over the contract period in proportion
to expected direct costs. New contract sales and renewals, which are reported
as earned revenue over the subsequent twelve-month contract period, increased
six percent in the second quarter and nine percent in the first six months. As
a result, much stronger growth in reported revenues is expected in the second
half of the year. Contract sales from customer renewals, which represent
approximately 60 percent of total annual contracts written, increased four
percent, supported by a larger base of renewable customers and continued strong
improvements in retention. Sales in the real estate channel, which represents
approximately 25 percent of total annual contracts written, increased 12
percent and included the beneficial impact of the Realogy agreement signed
during the third quarter of 2006. Excluding the impact of sales from the
Realogy agreement, real estate unit sales declined, as home listings and
closings were impacted by continued softness in the home resale market
throughout most of the country. The direct-to-consumer channel, which
represents approximately 15 percent of total annual contracts written,
experienced a one percent increase in sales. The decline in operating income
reflects an increase in sales and marketing costs, including expenses related
to the new Realogy agreement. Capital employed in the American Home
Shield segment decreased 18 percent, primarily reflecting increased deferred
revenues driven by growth in new contract sales. Marketable securities also
decreased due in part to reduced statutory reserve requirements in certain
states. Capital employed at American Home Shield, which totaled $190 million
and $231 million at June 30, 2007 and June 30, 2006, respectively, includes
$290 million and $304 million of cash, short-term and long-term marketable
securities at those dates. The investment income and realized gains/losses on
these assets are reported as non-operating income/expense.

The Other
Operations and Headquarters segment includes the operations of ServiceMaster
Clean, InStar and Merry Maids as well as the Companys headquarters functions.
Revenue in this segment decreased to $71 million from $81 million in 2006.
Revenue from InStar was $18 million compared to $32 million in the prior year.
InStar reported an operating loss of ($3.3) million, net of acquisition-related
amortization costs, compared to operating income, net of acquisition-related
amortization costs of $2.3 million in 2006. InStars results were negatively
impacted by a substantially lower volume of hurricane-related work, and
increased provisions for doubtful accounts. The combined franchise operations
of ServiceMaster Clean and Merry Maids reported a ten percent increase in
second quarter revenue, reflecting strong growth in disaster restoration
services as well as the impact of acquisitions at Merry Maids. The Other
Operations and Headquarters segment total operating loss for the quarter was
($23) million compared with ($5) million in 2006. Included in the second
quarter 2007 operating loss are restructuring charges of $8.3 million and
merger related expenses of $2.8 million. The 2006 results include restructuring
charges of $6.3 million. The increase in the segments operating loss for the
quarter reflects the increase in the aforementioned restructuring charges and
merger related expenses, a decrease in the operating results at

23

InStar, a $5
million increase in compensation expense related to the previously discussed
employee deferred compensation trust (for which there is a corresponding and
offsetting increase in investment income), and a higher level of incentive
compensation expense, offset in part by increased profits from the combined
franchise operations. Capital employed in this segment decreased, due in part
to the realization of the annual tax benefit associated with the amortization
of tax intangible assets that will continue through 2012.

SIX MONTHS ENDED JUNE
30, 2007 COMPARED TO 2006

The Company
reported revenue of $1.7 billion for the six months ended June 30, 2007, a two
percent increase compared to 2006. Total diluted earnings per share (continuing
operations and discontinued operations) were $0.33 compared to $0.21 in 2006.
The 2006 amount includes a non-cash charge of $0.08 per diluted share ($25
million after-tax) recorded in the first quarter of 2006 for expected losses on
the disposition of certain ARS/AMS properties that were held pending sale at
the time.

Diluted
earnings per share from continuing operations were $0.33 compared to $0.29 in
2006. Income from continuing operations totaled $96.9 million in 2007 compared
to $87.0 million in 2006. Operating income for the six months was $154 million
compared to $166 million in the prior year. As more fully described in the
second quarter comparison, the current year results include $10.8 million more
of pre-tax restructuring charges and merger related costs. The change in
operating income also primarily reflects strong profit growth at Terminix,
offset in part by lower profits at InStar and American Home Shield.

Cost of
services rendered and products sold increased two percent for the six months
and decreased as a percentage of revenue to 61.7 percent in 2007 from 62.0
percent in 2006, supported by lower termite materials costs at Terminix and an
increased volume of high-margin snow removal revenue in the first quarter at
TruGreen LandCare. Selling and administrative expenses increased five percent
for the six months. As a percentage of revenue, these costs increased to 27.9
percent in 2007 from 27.2 percent in 2006, primarily reflecting higher sales
and marketing expenses at American Home Shield associated in part with its new
contract with the Realogy brands and a $4 million increase in compensation
expense related to an employee deferred compensation trust, for which there is
a corresponding and offsetting increase in investment income within
non-operating expense/(income).

Net
non-operating expenses decreased approximately $17.6 million for the six
months, primarily reflecting $11 million more investment gains and income
realized on the American Home Shield investment portfolio, $4 million more
investment income related to the employee deferred compensation trust discussed
above, and a reduced level of interest expense.

The effective
tax rate from continuing operations for the six months ended June 30 was 35
percent in 2007 and 39 percent in 2006. The 2007 effective tax rate was
impacted by a $4 million reduction in tax expense resulting from the favorable
resolution of state tax items related to a prior non-recurring transaction, as
well as a $3 million reduction in tax expense resulting from incremental
deferred tax benefits that became recognizable during the second quarter of
2007 upon the conversion of the minority equity interests in Terminix into
eight million shares of ServiceMaster common stock.

24

Key Performance Indicators

The table
below presents selected metrics related to customer counts and customer
retention for the three largest profit businesses in the Company. These
measures are presented on a rolling, twelve-month basis in order to avoid seasonal
anomalies.

Key Performance Indicators
  As of June 30,2007

2006TruGreen
LawnCare-Growth in Full
Program Contracts


1
%

-3
%Customer
Retention Rate


68.5
%

65.4
%Terminix -Growth in Pest
Control Customers


7
%

3
%Pest Control
Customer Retention Rate


78.9
%

77.9
%Growth in
Termite Customers


1
%

-1
%Termite
Customer Retention Rate


87.6
%

87.3
%American Home Shield
-Growth in
Warranty Contracts


6
%

2
%Customer
Retention Rate


59.7
%

57.9
%Segment Reviews for the Six Months Ended June
30, 2007 Compared to 2006

As discussed
in the second quarter comparison, the following business segment reviews should
be read in conjunction with the required footnote disclosures presented in the
Notes to the Condensed Consolidated Financial Statements.

For the six
months, the TruGreen LawnCare segment reported a three percent increase in
revenue to $508 million compared to $495 million in 2006 and operating income
of $61 million, comparable to 2006 levels. Customer counts at June 30 were one
percent higher than last years level and improved from a one percent decline
that existed at the beginning of the year. The growth in customer counts was
supported by improved customer retention, which helped offset a four percent
decline in new sales, which were adversely impacted by poor April weather. The
rolling twelve-month retention rate improved 310 basis points over the prior
period as a result of improvements in overall quality of service delivery and
enhanced customer communication; including the Lawn Quality Audit (LQA) visits
initiated during the second half of 2006. Operating income for the six months
was comparable to last year as incremental profits from increased revenues were
offset by the realization of less fixed cost leverage in the first quarter this
year due to weather related delays in completing lawn service applications.

The TruGreen
LandCare segment reported a one percent decrease in revenue for the six months
to $215 million compared to $218 million in 2006, and a reduced operating loss
of ($2.1) million, compared to ($4.4) million in 2006. The decline in revenue
for the six months included a two percent decline in base contract maintenance revenue
and an eight percent decease in enhancement revenue, both of which are due in
part to the near-term impacts of the Companys efforts to improve the quality
of its customer portfolio as discussed in the second quarter comparison. These
factors were offset in part by a $6 million increase this year in first quarter
snow removal service revenue. The improvement in segment operating loss
primarily reflects the increase in high margin snow removal work, offset in
part by increased sales labor resulting from investments made to increase the
size, caliber and training of the sales team.

25

Revenue for
the six months in the Terminix segment increased two percent to $574 million
compared to $561 million in 2006. Operating income increased 15 percent to $107
million compared to $93 million in 2006. The segments overall revenue growth
for the six months reflected strong growth on the pest control side of the
business and increases in termite contract renewals, offset in part by a
decline in revenue from termite completions. Pest control revenues increased
ten percent for the six months as the beneficial effects of a 100 basis point
improvement in customer retention and the impact of acquisitions, more than
offset a decline in unit sales. Solid growth in termite renewal revenues was
supported by a 30 basis point improvement in customer retention. Revenue from
termite completions declined 13 percent, as a result of a weak annual termite
swarm season. Also impacting the decrease in revenue was a reduction in one-time
fees for converting existing bait customers to liquid treatments. The strong
growth in operating income reflects lower termite materials costs, management
of seasonal staffing of sales labor, and reduced overhead spending.

The American
Home Shield segment reported a two percent increase in revenue for the six
months to $281 million from $276 million in 2006 and a decrease in operating
income to $27 million from $34 million in 2006. New contract sales and
renewals, which are reported as earned revenue over the subsequent twelve-month
contract period, increased nine percent for the first six months. Contract
sales from customer renewals increased eight percent, reflecting a larger base
of renewable customers and a 180 basis point improvement in retention. Sales in
the real estate channel were supported by the favorable impact of the Realogy
agreement signed during the third quarter of 2006, with year-to-date sales
growth of 12 percent. Real estate unit sales, excluding the impact of sales
from the Realogy agreement, declined due to continued softness in the home
resale market throughout most of the country. Sales in the direct-to-consumer
channel increased four percent supported by incremental direct mail programs in
the fourth quarter of 2006. The decrease in operating income resulted from
increased sales and marketing expenses including planned investments related to
the new Realogy agreement.

The Other
Operations and Headquarters segment reported revenue of $144 million for the
six months, compared to $137 million in 2006. Revenue from InStar (which was
acquired on February 28, 2006) was $40 million compared to $43 million in the
prior year. InStar reported an operating loss of ($5.7) million, net of
acquisition-related amortization costs, compared to operating income, net of
acquisition-related amortization costs of $3.4 million in 2006. InStars
results were negatively impacted by a substantially lower volume of
hurricane-related work, as well as increased provisions for doubtful accounts
receivables associated with prior year hurricanes. The combined franchise
operations of ServiceMaster Clean and Merry Maids reported a 12 percent
increase in revenue reflecting a strong increase in product sales and disaster
restoration services, as well as the impact of acquisitions at Merry Maids. The
Other Operations and Headquarters segment operating loss for the six months was
($40) million compared to a loss of ($17) million in 2006. Included in the six
month operating loss are restructuring charges of $15.3 million and merger
related expenses of $5.3 million. The 2006 results include restructuring
charges of $9.8 million. The increase in the segments operating loss for the
six months reflects the increase in the aforementioned restructuring charges
and merger related expenses, a decrease in the operating results at InStar, a
$4 million increase in compensation expense related to the previously discussed
employee deferred compensation trust, and a higher level of incentive
compensation expense, offset in part by increased profits from the combined
franchise operations.

FINANCIAL POSITION AND LIQUIDITY



Cash Flows from
Operating Activities from Continuing OperationsNet cash
provided from operating activities from continuing operations for the six
months was $144 million, compared to $96 million in the prior year. The
increase in cash provided from operating activities from continuing operations
resulted from lower working capital requirements, primarily due to improvements
in InStar receivable collections and the timing of customer prepayments at
TruGreen LawnCare.

26

The Company
receives a significant annual cash tax benefit due to a large base of
intangible assets which exist for income tax reporting purposes, but not for
financial reporting purposes. A significant portion of these assets arose in
connection with the Companys 1997 conversion from a limited partnership to a
corporation. The amortization of the tax basis will result in approximately $50
to $55 million of average annual cash tax benefits through 2012, for which no
corresponding income statement benefit is recognized. Subsequent to 2012, the
benefit from the step-up in tax basis that resulted from the reincorporation
will be fully amortized.

In the
ordinary course, the Company is subject to review by domestic and foreign
taxing authorities, including the IRS. As previously disclosed, the U.S.
federal tax returns filed by the Company through the 2005 return have been
reviewed by the IRS. The Company paid $5 million primarily in the first quarter
of 2006 relating to the resolution of the 2003 and 2004 audits. In the fourth
quarter of 2006, the IRS completed the audit of the Companys tax return for
2005, with no adjustments or additional payments. The IRS commenced
examinations of the Companys U.S. federal income tax returns for 2006 and 2007
in the first quarter of 2006 and 2007, respectively, which are anticipated to
be completed by the end of 2007 and 2008, respectively. At this time, the
outcome of these audits is not known and no significant adjustments have been
proposed by the IRS to date pertaining to these audit periods.

Cash Flows from
Investing Activities from Continuing OperationsCapital
expenditures decreased from the prior year and included recurring capital needs
and information technology projects. The Company anticipates approximately $50
million of capital expenditures in 2007, reflecting the continuation of
investments in information systems and productivity enhancing operating
systems. The Company has no material capital commitments at this time.

Acquisitions
for the six months ended June 30, 2007 totaled $31 million, compared with $116
million in 2006. This decrease reflects the 2006 acquisition of InStar, a
leading direct provider of commercial disaster response and reconstruction services,
for approximately $85 million of cash. Consideration paid for tuck-in
acquisitions consisted of cash payments, seller financed notes and Company
stock. The Company expects to continue its tuck-in acquisition program at both
Terminix and TruGreen LawnCare.

The change in
notes receivable, financial investments and securities reflect an increase in
the net sale of marketable securities at American Home Shield due in part to
reduced statutory reserve requirements in certain states.



Cash Flows from Financing
Activities from Continuing OperationsCash dividends
paid to shareholders totaled $70 million, or $.24 per share for the six months
ended June 30, 2007. On May 31, 2007, the Company paid its last dividend to
shareholders prior to the Merger.

Due to the
pending Merger Agreement, there were no share repurchases for the six months
ended June 30, 2007.



LiquidityCash and short
and long-term marketable securities totaled approximately $437 million at June
30, 2007, compared with approximately $421 million at December 31, 2006.
Approximately $381 million of the cash and short and long-term marketable
securities balance is associated with regulatory requirements at American Home
Shield and for other purposes. Total debt at June 30, 2007 was $655 million,
approximately $35 million less than the amount at December 31, 2006 reflecting
strong cash flows and lack of share repurchases (due to the pending Merger
Agreement) for the six months ended June 30, 2007. The Companys 2007 Notes
mature on August 15, 2007. This $49.2 million of debt is classified as
long-term debt in the Condensed Consolidated Statements of Financial Position
because the Company intends to refinance the 2007 Notes on a long-term basis.
The Company has the ability to consummate the refinancing, when considered
necessary. As of June 30, 2007, the Company had the ability to consummate the
refinancing by utilizing its existing revolving bank credit facility. Upon
completion of the Merger, the

27

Company
intends to refinance the 2007 Notes on a long-term basis by utilizing a portion
of the proceeds from the Term Facilities that were entered into as part of the
Merger.

As of June 30,
2007, the Company maintained a revolving credit facility of $500 million. The
Company did not have any borrowings outstanding under this facility but had
issued approximately $138 million of letters of credit, resulting in unused
revolving credit commitments of approximately $362 million. At June 30, 2007,
the Company also had $550 million of senior unsecured debt and equity
securities available for issuance under an effective shelf registration
statement. These securities were de-registered in connection with the Merger.
In addition, at June 30, 2007, the Company had an arrangement enabling it to
sell, on a revolving basis, certain receivables to unrelated third party
purchasers. The Company may sell up to $70 million of its receivables to these
purchasers in the future and therefore would have immediate access to cash
proceeds from these sales. The amount of the eligible receivables varies during
the year based on seasonality of the business and will at times limit the
amount available to the Company. During the six month period ended June 30,
2007, there were no receivables sold to third parties under this agreement.

As described
in the Companys 2006 Annual Report, the Company was party to a number of debt
agreements that required it to maintain certain financial and other covenants,
including limitations on indebtedness and an interest coverage ratio. Failure
by the Company to maintain these covenants could result in the acceleration of
the maturity of the debt. At June 30, 2007, the Company was in compliance with
the covenants related to these debt agreements.

The Merger was
completed on July 24, 2007 (the Closing Date). Following the completion of
the Merger, our business is highly leveraged, and a substantial portion of our
liquidity needs will arise from debt service on indebtedness incurred in
connection with the Merger and the Transactions and from funding our
operations, working capital and capital expenditures. Equity contributions
totaling $1,431.1 million from the Equity Sponsors, together with (i)
borrowings under a new $1,150 million unsecured senior interim loan facility,
(ii) borrowings under the $2,650 million senior secured term loan facility, and (iii)
cash on hand at ServiceMaster, were used, among other things, to finance the
aggregate Merger Consideration, to make payments in satisfaction of other
equity-based interests in ServiceMaster under the Merger Agreement, to make
certain payments with respect to synthetic lease facilities, to settle existing
interest rate swaps, to redeem or provide for the repayment of certain of the
Companys existing indebtedness and to pay related transaction fees and expenses.
In addition, letters of credit issued under a new $150 million pre-funded
letter of credit facility (together with the senior secured term loan facility,
the Term Facilities) were used to replace and/or secure letters of credit
previously issued under the ServiceMaster revolving credit facility that was
terminated as of the Closing Date. On the Closing Date, the Company also
entered into, but did not draw under, a new $500 million senior secured
revolving credit facility.

In connection
with the Transactions, ServiceMaster refinanced certain of its existing
indebtedness, including ServiceMasters $179.0 million, 7.875% notes due August
15, 2009 (the 2009 Notes). On the Closing Date, the 2009 Notes were called
for redemption on August 29, 2007. Additionally, the Company intends to utilize
a portion of the proceeds from the Term Facilities to repay at maturity
ServiceMasters $49.2 million, 6.95% notes due August 15, 2007 (the 2007
Notes). ServiceMasters existing indebtedness that remains outstanding after
the Transactions and the redemption of the 2009 Notes and repayment of the 2007
Notes includes the $79.5 million, 7.10% notes due March 1, 2018, $195.0
million, 7.45% notes due August 15, 2027, and $82.7 million, 7.25% notes due
March 1, 2038 and certain capital leases and deferred payment obligations.

Term Facilities

On the Closing
Date, in connection with the completion of the Merger, Acquisition Co. (the
rights and obligations of which have been assumed by the Company in connection
with the Merger) entered into the Term Facilities.

28

The Term
Facilities consist of (1) the Senior Term Loan Facility providing for term
loans in an aggregate principal amount of $2,650 million, $240 million of which
may be borrowed on a delayed draw basis until October 2007 to repay at maturity
the 2007 Notes and to redeem the 2009 Notes, and (2) a pre-funded synthetic
letter of credit facility in an aggregate principal amount of $150 million.

The Term
Facilities will mature on July 24, 2014. The interest rates applicable to the
loans under the Term Facilities are based on a fluctuating rate of interest
measured by reference to either, at ServiceMasters option, (i) an adjusted
London inter-bank offered rate (adjusted for maximum reserves), plus a
borrowing margin (as of July 24, 2007  2.75%), or (ii) an alternate base rate,
plus a borrowing margin (as of July 24, 2007  1.75%). The borrowing margin, in
each case, will be adjusted from time to time based on the consolidated secured
leverage ratio for the previous fiscal
quarter. Overdue amounts will bear interest at a rate that is 2% higher than
the rate otherwise applicable.

In August
2007, the Company entered into three, 3-year interest rate swap agreements,
effective September 4, 2007. The total notional amount of the agreements was
$530 million. Under the terms of the agreements, the Company will pay a
weighted average fixed rate of interest of approximately 5.05% on the $530 million
notional amount and the Company will receive a floating rate of interest (based
on the one month LIBOR) on the notional amount.

Revolving Credit Facility

On the Closing
Date, in connection with the completion of the Merger, ServiceMaster entered
into a credit agreement, dated July 24, 2007 (the Revolving Credit Facility).
The Revolving Credit Facility provides for senior secured revolving loans and
stand-by and other letters of credit of up to a maximum aggregate principal
amount of $500 million. There were no amounts outstanding under the Revolving
Credit Facility on the Closing Date.

The final
maturity date of the Revolving Credit Facility is July 24, 2013. The interest
rates applicable to the loans under the Revolving Credit Facility will be based
on a fluctuating rate of interest measured by reference to either, at the
borrowers option, (1) an adjusted London inter-bank offered rate (adjusted for
maximum reserves), plus a borrowing margin (as of July 24, 2007  2.75%), or
(2) an alternate base rate, plus a borrowing margin (as of July 24, 2007 
1.75%). The borrowing margin, in each case, will be adjusted from time to time
based on the Consolidated Secured Leverage Ratio (as defined in the Revolving
Credit Agreement) for the previous fiscal quarter. Overdue amounts will bear
interest at a rate of 2% higher than the rate otherwise applicable.

Interim Loan Facility

On the Closing
Date, in connection with the completion of the Merger, Acquisition Co. entered
into an unsecured senior interim loan credit agreement, dated July 24, 2007 (the Interim Loan Facility). The
rights and obligations of Acquisition Co. under the Interim Loan Facility were
assumed by ServiceMaster.

The Interim
Loan Facility will mature on July 24, 2008. Outstanding amounts under the
Interim Loan Facility loans will be required to be repaid in full on the
maturity date; provided, however, that (x) if ServiceMaster has failed to raise
permanent financing to refinance the Interim Loan Facility loans before the
maturity date or (y) at the election of the Company following the completion of
a standard high yield road show after which no senior notes to refinance in
whole or part the Interim Loan Facility loans were issued, the Interim Loan
Facility loans shall be converted into 10.75%/11.50% senior toggle notes due
2015 (Permanent Notes) up to an aggregate principal amount equal to the
aggregate principal amount of the then-outstanding Interim Loan Facility loans.
The Permanent Notes would be issued pursuant to a refinancing indenture. In
connection with the issuance of Permanent Notes, ServiceMaster would enter into
a registration rights agreement to be dated the date of the issuance of the
Permanent Notes, pursuant

29

to which
ServiceMaster will be required to file a shelf registration statement (or, at
ServiceMasters option, an exchange offer registration statement) with respect
to the Permanent Notes.

ServiceMaster
may, at its option prior to the start of any interest period, elect to pay
interest on the Interim Loan Facility entirely in cash (Cash Interest),
entirely by increasing the principal amount of the outstanding loans (PIK
Interest), or 50% as Cash Interest and 50% as PIK Interest. Interest for the
first interest period will be payable entirely as Cash Interest.

The interest
rates applicable to the loans under the Interim Loan Facility will be based on
a fluctuating rate of interest measured by reference to an adjusted London
inter-bank offered rate (adjusted for maximum reserves), plus a borrowing
margin (as of July 24, 2007  4.50%) and, in the case of PIK Interest, an
additional PIK margin of 0.75%. Overdue amounts will bear interest at a rate
that is 2% higher than the rate otherwise applicable. If the borrowings under
the Interim Loan Facility are not repaid in whole within the six-month period
following the Closing Date, the borrowing margin will increase by 0.50% per
annum at the end of such six-month period and shall increase by an additional
0.50% per annum at the end of each three-month period thereafter until, but
excluding, the maturity date, provided, however, that such interest rate shall
not exceed 10.75% in the case of Cash Interest or 11.50% in the case of PIK
Interest.

The Company
maintains lease facilities with banks totaling $68 million which provide for
the financing of branch properties to be leased by the Company. At June 30,
2007, approximately $68 million was funded under these facilities.
Approximately $15 million of these leases are treated as capital leases and
have been included on the balance sheet as assets with related debt as of June
30, 2007 and December 31, 2006. The balance of the funded amount is treated as
operating leases. Approximately $15 million of the available facility expires
in January 2008 and the remaining $53 million expires in September 2009. The Company
has guaranteed the residual value of the properties under the leases up to 82
percent of the fair market value at the commencement of the lease. At June 30,
2007, the Companys residual value guarantee related to the leased assets
totaled $53 million for which the Company has recorded the estimated fair value
of this guarantee (approximately $0.6 million) in the Condensed Consolidated
Statements of Financial Position. In connection with the closing of the Merger,
the Company amended these leases effective July 24, 2007. Among the
modifications, the Company extended the lease terms through July 24, 2010 and
purchased the credit notes of the properties. The purchased credit notes
totaled approximately $23 million and will be recorded as an investment by the
Company. The operating lease and capital lease classifications of these leases
did not change as a result of the modifications.

The majority
of the Companys fleet and some equipment are leased through operating leases.
The lease terms are non-cancelable for the first twelve-month term, and then
are month-to-month, cancelable at the Companys option. There are residual
value guarantees (ranging from 70 percent to 87 percent depending on the
agreement) relative to these vehicles and equipment, which historically have
not resulted in significant net payments to the lessors. At June 30, 2007,
there was approximately $208 million of residual value relating to the
Companys fleet and equipment leases. The fair value guarantee of the assets
under the leases is expected to fully mitigate the Companys obligations under
the agreements. At June 30, 2007, the Company has recorded the estimated fair
value of this guarantee (approximately $1.3 million) in the Condensed
Consolidated Statements of Financial Position.

The Term
Facilities, Revolving Credit Facility and the guarantees thereof are secured by
(i) all of the capital stock of ServiceMaster, all capital stock of all
domestic subsidiaries owned by ServiceMaster and the guarantors, (ii) 65% of
the capital stock of any non-U.S. subsidiary held directly by ServiceMaster or
any guarantor (it being understood that a foreign subsidiary holding company
will be deemed a non-U.S. subsidiary) and (iii) substantially all other
tangible and intangible assets owned by ServiceMaster and each guarantor, in
each case to the extent permitted by applicable law and subject to certain
exceptions, including but not limited to exceptions for capital stock,
indebtedness or other obligations of any subsidiary, real estate or any other property
or assets to the extent that granting a security interest therein would require
that any notes issued under the Companys existing indenture dated as of August
15, 1997, as amended or

30

supplemented
to date, be secured. The Term Facilities and the Revolving Credit Facility will
not be secured by any assets of a subsidiary subject to regulation as an
insurance, home warranty, service contract or similar company (or any
subsidiary thereof), including but not limited to trademarks, other intellectual
property, receivables and franchise loans owned by any such subsidiary. In
addition, on the Closing Date, ServiceMaster Consumer Services Limited
Partnership (the Pledgor) and the Company entered into a Security Agreement,
dated as of July 24, 2007 (the Term Loan Security Agreement), in favor of the
term loan administrative agent and collateral agent, pursuant to which the
Pledgor granted to the term loan collateral agent, a security interest in a
promissory note, made by The Terminix International Company Limited Partnership
in favor of the Pledgor, subject to the limitations provided for in the Term
Loan Security Agreement. The Term Facilities are secured on a pari passu basis
with the security interests created in the same collateral securing the Revolving
Credit Facility.

The Companys
ongoing liquidity needs are expected to be funded by net cash provided by
operating activities and borrowings under the Interim Loan Facility, the Term
Facilities and the Revolving Credit Facility (collectively, the Credit
Facilities). We expect that cash provided from operations and available
borrowings under our Credit Facilities will provide sufficient funds to operate
our business, make expected capital expenditures and meet our foreseeable
liquidity requirements, including debt service on our debt.

As a holding
company, we depend on our subsidiaries to distribute funds to us so that we may
pay our obligations and expenses, including our debt service obligations under
our debt. The ability of our subsidiaries to make distributions and dividends
to us depends on their operating results, cash requirements and financial
condition, general business conditions, and any legal and regulatory
restrictions on the payment of dividends to which they may be subject. The payment
of ordinary and extraordinary dividends by our subsidiaries that are regulated
as insurance, home warranty, service contract or similar companies is subject
to applicable state law limitations.

The Companys
2006 Annual Report included disclosure of the Companys contractual obligations
and commitments as of December 31, 2006. The Company continues to make the
contractually required payments and therefore, the 2007 obligations and
commitments as listed in the December 31, 2006 Annual Report have been reduced
by the required payments. There were no significant additions during the six
months ended June 30, 2007. Subsequent to June 30, 2007 and in connection with
the Transactions, the Company incurred incremental debt balances of
approximately $3.6 billion.Financial PositionReceivables
increased from year-end levels reflecting general business growth and increased
seasonal activity. The receivable balance at June 30, 2007 includes
approximately $49 million of InStar receivables (including approximately $18
million of work-in-process that has not yet been billed). InStars receivables
include hurricane disaster recovery work performed in New Orleans, southern
Florida and other hurricane-affected areas in late 2005 and 2006. The Company
has accounts receivable from customers that were insured by a family of
insurance companies in Florida that are insolvent, and whose claims are now
being administered by the Florida Insurance Guaranty Association (FIGA). The
net receivable balance due from FIGA insured customers is not material to the
Companys consolidated financial statements. The Company expects that
collection of certain of InStars receivables, potentially including certain of
those administered by FIGA, will be significantly delayed and require or involve
litigation. While InStar has a history of recovering amounts related to its
disaster recovery projects, the current circumstances increase the
uncertainties in estimating the amounts recoverable on certain projects. The
consolidated allowance for doubtful accounts at June 30, 2007 included
approximately $8 million related to InStars accounts receivable. Such
allowance reflects managements best estimate of the amounts that will not be
collected. If the estimated amounts recoverable on the projects change from the
amounts currently recorded, these differences will be recognized as income or
loss when the change in estimate is made. Such changes, if any, would not
currently be expected to be material to the Companys consolidated financial
statements.


Inventories
increased from year-end levels, reflecting general business growth and
increased seasonal activity. Prepaid expenses and other assets increased from
year-end primarily reflecting preseason

31

advertising
costs at TruGreen LawnCare as well as costs of annual repair and maintenance
procedures that are performed primarily in the first quarter at TruGreen
LawnCare. These costs are deferred and recognized over the production season
and are not deferred beyond the calendar year end. Deferred customer
acquisition costs increased, reflecting the seasonality in the lawn care
operations. In the winter and spring, this business sells a series of lawn
applications to customers, which are rendered primarily in March through
October. These direct and incremental selling expenses which relate to
successful sales are deferred and recognized over the production season and are
not deferred beyond the calendar year-end. The Company capitalizes sales
commissions and other direct contract acquisition costs relating to termite
baiting and pest contracts, as well as home warranty agreements. These costs
vary with and are directly related to a new sale, and are amortized over the
life of the related contract.

Property and
equipment was consistent with year-end levels. The Company does not have any
material capital commitments at this time.

Deferred
revenue increased from year-end levels, reflecting the significant amount of
customer prepayments recorded in the first quarter (pre-season) at TruGreen
LawnCare and growth in prepaid contracts written at American Home Shield. The
increase in accounts payable from year-end levels reflects peak seasonality at
several of the business units. Accrued payroll and related expenses have
increased for employee retention and severance accruals as a result of the
Companys corporate headquarter consolidation plan.

On June 4,
2007, the Company converted into eight million shares of ServiceMaster common
stock the minority equity interests of the minority investors in Terminix.

Total shareholders
equity was $1.3 billion at June 30, 2007 and $1.1 billion at December 31, 2006.
The increase reflects operating profits in the business, the conversion of the
minority equity interests in Terminix into eight million shares of
ServiceMaster common stock, and proceeds from employee share plans, offset in
part by cash dividend payments.

Under federal
tax rules, dividends are considered taxable only when paid out of current or
accumulated earnings and profits as defined under federal tax laws. As a result
of its December 1997 reincorporation, the Company only began generating
corporate earnings and profits for tax purposes in 1998. Since 1998, earnings
and profits for tax purposes have been reduced by dividend payments,
amortization of intangible assets that exist for tax reporting purposes only,
deductions relating to business closures, divestitures and restructuring
charges, and the timing of certain other tax-related items. The Company
currently expects that none of the 2007 dividend will be taxable as dividend
income for federal income tax purposes. This differs from previous projections
primarily due to transaction-related costs associated with the Merger. Any
portion of the dividend that is not taxable as dividend income would be treated
as a return of capital and would generally be applied to reduce the cost basis
of outstanding shares. The 2007 estimate is subject to change, based on the
outcome of future events.DISCONTINUED OPERATIONSThe changes in
the results of operations and financial position of discontinued operations
primarily results from the divestitures in the third quarter of 2006 of the
American Residential Services (ARS) and American Mechanical Services (AMS)
businesses. Additionally, during the first quarter of 2006, the Company
recorded a $25 million after-tax impairment charge for expected losses on the
disposition of certain ARS/AMS properties that were held pending sale at that
time.



As part of the
ARS and AMS sale agreements, the Company guaranteed obligations to third parties
with respect to bonds (primarily performance and license type), operating
leases for which the Company has been released as being the primary obligor,
real estate leased and operated by the buyers, and other guarantees of payment.
At the present time, the Company does not believe it is probable that the
buyers will default on their obligations subject to guarantee. The fair value
of the Companys obligations related to these guarantees is not significant and
no liability has been recorded.

32

Cautionary Note
Regarding Forward-Looking Statements

This report contains forward-looking
statements within the meaning of the federal securities laws, which involve
risks and uncertainties. Forward-looking statements include all statements that
do not relate solely to historical or current facts, and you can identify
forward-looking statements because they contain words such as believes,
expects, may, will, should, seeks, approximately,
intends,
plans, estimates, projects or anticipates or similar expressions that
concern our strategy, plans or intentions. Any statements made relating to our
estimated and projected earnings, margins, cost savings, expenditures, cash
flows, growth rates, strategies and financial results are forward-looking
statements. These forward-looking statements are subject to risks and
uncertainties that may change at any time, and, therefore, our actual results
may differ materially from those that we expected. We derive many of our
forward-looking statements from our operating budgets and forecasts, which are
based upon many detailed assumptions. While we believe that our assumptions are
reasonable, we caution that it is very difficult to predict the impact of known
factors, and, of course, it is impossible for us to anticipate all factors that
could affect our actual results.

Some of the important factors that could
cause actual results to differ materially from our expectations are more fully
disclosed in our most recent Annual Report on Form 10-K, as amended, and our
Quarterly Report for the period ended March 31, 2007, and in Part II, Item 1A
in this report. All subsequent written and oral forward-looking statements
attributable to us, or persons acting on our behalf, are expressly qualified in
their entirety by the cautionary statements. We assume no obligation to
publicly update or revise any forward-looking statement as a result of new
information or future events, except as otherwise required by law.

Factors that could cause actual results to
differ materially from those expressed or implied in a forward-looking
statement may include the following (among others): the impact of substantial
indebtedness incurred to finance the consummation of the Merger; our ability to
generate the significant amount of cash needed to service our debt obligations;
increases in interest rates; weather conditions and seasonality factors that
affect the demand for our services; changes in the source and intensity of
competition in our markets; higher fuel prices; increases in operating costs,
such as higher insurance premiums, self-insurance costs and health care claim
costs; labor shortages or increases in wages and salaries; the risk that the
benefits from the Merger may not be fully realized or may take longer to
realize than expected; changes in general economic conditions in the United
States, especially as they may affect home resales, consumer confidence or
spending levels; changes in the type or mix of our service offerings or
products; governmental regulation, including telemarketing restrictions and
environmental restrictions on pesticides and fertilizers; the successful
consolidation of our headquarters in Memphis and our ability to recruit senior
functional management personnel; changes in the estimated recoverable amounts
of receivables related to hurricane disaster recovery work; the costs and
effects of legal or administrative proceedings; risks inherent in acquisitions;
and other factors described from time to time in documents filed by the Company
with the Securities and Exchange Commission.

33

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

As previously
discussed in the Merger Agreement section of the Management Discussion and
Analysis of Financial Condition and Results of Operations, the financing of the
Merger completed on July 24, 2007 was financed, in part, by borrowings under
new loan and credit facilities. Additionally, in August 2007, the Company
entered into three, 3-year interest rate swap agreements, effective September
4, 2007. The total notional amount of the agreements was $530 million. Under
the terms of the agreements, the Company will pay a weighted average fixed rate
of interest of approximately 5.05% on the $530 million notional amount and the
Company will receive a floating rate of interest (based on the one month LIBOR)
on the notional amount.

The economy
and its impact on discretionary consumer spending, labor wages, fuel prices,
home re-sales, unemployment rates, insurance costs and medical inflation rates
could be significant to future operating earnings.

The Company
does not hold or issue derivative financial instruments for trading or
speculative purposes. The Company has entered into specific financial
arrangements, primarily fuel hedges, in the normal course of business to manage
certain market risks, with a policy of matching positions and limiting the
terms of contracts to relatively short durations. The effect of derivative
financial instrument transactions is not material to the Companys financial
statements.

In December
2003 and January 2004, the Company entered into interest rate swap agreements
with a total notional amount of $165 million. Under the terms of these
agreements, the Company pays a floating rate of interest (based on a specified
spread over six-month LIBOR) on the notional amount and the Company receives a
fixed rate of interest at 7.88 percent on the notional amount. The impact of
these swap transactions was to convert $165 million of the Companys debt from
a fixed rate of 7.88 percent to a variable rate based on LIBOR (9.4 percent
average rate during the six months ended June 30, 2007). In connection with the
closing of the Merger, effective July 24, 2007 these swaps were terminated.

Prior to the
completion of the Merger, the Company believed its exposure to interest rate
fluctuations, when viewed on both a gross and net basis, was not material to
its overall results of operations. On a gross basis, the Companys adverse
exposure to rising interest rates principally relates to interest payments on floating
rate debt ($175 million at June 30, 2007, after considering the effect of
interest rate swap agreements) and payments on operating leases that are tied
to floating interest rates. These operating leases consist of approximately $53
million of funding outstanding under the Companys real estate operating lease
facilities as well as fleet and equipment operating leases (approximately $208
million in residual value). The Companys exposure to interest expense based on
floating rates is partially offset on a net basis by floating rate investment
income earned on its cash and marketable securities balances. The Company
estimates that on a net basis, each one percentage point change in interest
rates would result in a change of less than $3 million pretax on an annual
basis.

The Company
has several debt and lease agreements where the interest rate or rent payable
under the agreements automatically adjusts based on changes in the Companys
credit ratings. Following the announcement that the Company had entered into
the Merger agreement, the Companys debt credit rating was reduced by two
credit rating agencies. As a result, the annual rent payable under a lease
agreement was increased by approximately $.6 million, pretax. Based on amounts
outstanding at June 30, 2007, and before consideration of the impacts of the
Merger, a one rating category reduction in the Companys credit rating by
another credit rating agency would further increase annual expense by
approximately $1.0 million, pretax.

The following
table summarizes information about the Companys fixed rate debt as of December
31, 2006 (after considering the effect of the interest rate swap agreements),
including the principal cash payments and related weighted-average interest
rates by expected maturity dates. The fair-value of the Companys fixed rate
debt was approximately $448 million at December 31, 2006.

34

Expected Maturity DateThere-(In
 millions)

2007


2008


2009


2010


2011


after


TotalFixed rate debt


$
70



$
13



$
27



$
11



$
8



$
356



$
485Avg. rate



6.5
%



7.3
%



7.2
%



6.7
%



6.8
%



7.5
%



7.3
%35

CONTROLS AND
PROCEDURES

The Companys Chief
Executive Officer, J. Patrick Spainhour, and the Companys Vice Chairman and
Chief Financial Officer, Ernest J. Mrozek, have evaluated the Companys
disclosure controls and procedures as of the end of the period covered by this
report.

The Companys disclosure
controls and procedures include a roll-up of financial and non-financial
reporting that is consolidated in the Downers Grove, Illinois office of the
Company. The reporting process is designed to ensure that information required
to be disclosed by the Company in the reports that it files with or submits to
the Securities and Exchange Commission is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions
rules and forms. Messrs. Spainhour and Mrozek have concluded that both the
design and operation of the Companys disclosure controls and procedures are
effective.

There were no changes in the
Companys internal control over financial reporting that occurred during the
Companys most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

36

PART
II. OTHER INFORMATION

Item 1: Legal Proceedings

Class
Action suits brought against the Company and CD&R

Following the announcement of the proposed
acquisition of ServiceMaster by CD&R, five (5) complaints were filed
against ServiceMaster concerning the proposed merger: Kaiman v. Spainhour, et
al. (filed in Chancery Court in Memphis, Tennessee) (Kaiman); Golombuski v.
The ServiceMaster Co., et al. (filed in Circuit Court in Memphis, Tennessee)
(Golombuski); Sokol and Bowen v. The ServiceMaster Co., et al. (filed in
Circuit Court in Memphis, Tennessee) (Sokol); Palmer v. The ServiceMaster
Co., et al. (filed in Cook County Circuit Court in Chicago, Illinois)
(Palmer); and Smith v. The ServiceMaster Co., et al. (filed in Chancery Court
for Newcastle County, Delaware) (Smith).

All of the complaints name
ServiceMaster, its CEO and its Board of Directors as defendants. The Kaiman,
Golombuski and Smith complaints additionally name CD&R as a defendant and
the Smith complaint also names the investors in CDRSVM Topco, Inc., CDRSVM
Topco, Inc. and Acquisition Co. All of the complaints allege breach of
fiduciary duties and seek injunctive relief. The Kaiman complaint also contains
a specific count seeking indemnification of costs. The Golombuski and Smith
complaints also allege that CD&R aided and abetted the individual
defendants breach of fiduciary duties, while the Kaiman complaint generally
alleges that defendants breached their fiduciary duties or aided and abetted
a breach of fiduciary duty. The Smith complaint also alleges that there are
material omissions in the preliminary proxy statement relating to the proposed
acquisition that the Company filed with the SEC on April 16, 2007. All five of
the complaints challenged and indicated an intent to enjoin the proposed
acquisition of ServiceMaster.

After the plaintiff in the
Smith case filed a motion for expedited discovery and for the scheduling of a
preliminary injunction hearing, the parties to the Smith case reached an
agreement in principle to settle that case on a class wide basis and entered
into a Memorandum of Understanding reflecting that agreement. The Memorandum of
Understanding provides, among other things, for ServiceMaster to include
certain additional disclosures in the final Proxy Statement with respect to the
proposed merger (subsequently made) and for a reduction of the Company
termination fee from $100 million to $90.8 million (subsequently made). The
parties are negotiating a definitive Stipulation of Settlement, which requires
confirmatory discovery to be completed by the plaintiffs and the approval of
the Delaware Court.

Notwithstanding the
settlement agreement reached in the Smith case, the plaintiffs in the other
four pending actions nonetheless attempted to pursue those actions. The Kaiman,
Golombuski and Sokol complaints were consolidated, and the Tennessee court
handling those cases entered an order denying the plaintiffs motion for
expedited discovery and granting a stay of these actions pending the resolution
of the Smith case in Delaware. The Illinois court handling the Palmer case
denied the plaintiffs motion for expedited discovery and dismissed the
complaint on the basis of the pending settlement in Delaware. The plaintiff in
Palmer has taken an appeal from that dismissal.

The Company believes that
the settlement agreement with respect to the Smith case should resolve all of
the foregoing litigation. Notwithstanding the settlement, the Company believes
the various litigation to be without merit and, if the settlement is not fully
consummated for any reason, intends to defend them vigorously.

37

Item 1A: Risk Factors

We have
substantial debt and may incur substantial
additional debt, which could adversely affect our financial health and our
ability to obtain financing in the future, react to changes in our business and
make payments on our debt.

Subsequent
to June 30, 2007 and in connection with the Transactions, the Company incurred
incremental debt balances of approximately $3.6 billion.

Our
substantial debt could have important consequences to holders of our debt.
Because of our substantial debt:


our ability to engage in
 acquisitions without raising additional equity or obtaining additional debt
 financing may be impaired in the future;
our ability to obtain
 additional financing for working capital, capital expenditures, acquisitions,
 debt service requirements or general corporate purposes and our ability to
 satisfy our obligations with respect to our debt may be impaired in the
 future;
a substantial portion of
 our cash flow from operations must be dedicated to the payment of principal
 and interest on our debt, thereby reducing the funds available to us
 for other purposes;
we are exposed to the
 risk of increased interest rates because a portion of our borrowings,
 including under the Interim Loan Facility, the Term Facilities and the
 Revolving Credit Facility (collectively, the Credit Facilities), and
 certain floating rate operating leases are at variable rates of interest;
it may be more difficult
 for us to satisfy our obligations to our creditors, resulting in possible
 defaults on and acceleration of such debt;
we may be more
 vulnerable to general adverse economic and industry conditions;
we may be at a
 competitive disadvantage compared to our competitors with less debt or with
 comparable debt at more favorable interest rates and that, as a result, may
 be better positioned to withstand economic downturns;
our ability to refinance
 debt may be limited or the associated costs may increase; and
our flexibility to
 adjust to changing market conditions and ability to withstand competitive
 pressures could be limited, or we may be prevented from carrying out capital
 spending that is necessary or important to our growth strategy and efforts to
 improve operating margins of our businesses.Despite our
indebtedness levels after the Merger, we
and our subsidiaries may be able to incur substantially more debt, including
secured debt. This could further exacerbate the risks associated with our
substantial debt.

We
and our subsidiaries may be able to incur substantial additional debt
in the future. The terms of our debt do not prohibit us or our subsidiaries
from doing so. The Credit Facilities provide us with commitments for additional
borrowings of up to $500 million under the Revolving Credit Facility and permit
additional borrowings beyond those commitments under certain circumstances.

38

The agreements
and instruments governing our debt
contain restrictions and limitations that could significantly impact our
ability to operate our business.

The
agreements governing our debt contain covenants that, among other things, restrict our ability
to:


dispose of assets;
incur additional
 debt (including guarantees of additional debt);
prepay other
 debt or amend other debt instruments;
pay dividends and make
 certain payments;
create liens on assets;
enter into sale and
 leaseback transactions;
engage in certain asset
 sales, mergers, acquisitions, consolidations or sales of all or substantially
 all of our assets;
engage in certain
 transactions with affiliates;
permit restrictions on
 our subsidiaries ability to pay dividends;
change our business; and
make investments (including joint ventures).The
restrictions in the agreements governing our debt may prevent us from taking actions that
we believe would be in the best interest of our business and may make it
difficult for us to execute our business strategy successfully or effectively
compete with companies that are not similarly restricted. We may also incur future
debt obligations that might subject us to additional restrictive covenants that
could affect our financial and operational flexibility. We cannot assure you
that we will be able to refinance our debt on terms acceptable to us, or at
all.

Our
ability to comply with the covenants and restrictions contained in the agreements governing our debt
may be affected by economic, financial and industry conditions
beyond our control. The breach of any of these covenants or restrictions could
result in a default under an agreement that would permit the
applicable lenders to declare all amounts outstanding there under to be due and
payable, together with accrued and unpaid interest. If we are unable to repay
debt, lenders having secured obligations, such as the lenders under the Term
Facilities, could proceed against the collateral securing the debt. In any such
case, we may be unable to borrow under the Credit Facilities and may not be
able to repay the amounts due under the Credit Facilities. This could have
serious consequences to our financial condition and results of operations and
could cause us to become bankrupt or insolvent.

Our ability to
generate the significant amount of cash
needed to pay interest and principal on our debt and our ability to refinance
all or a portion of our debt or obtain additional financing depends on
many factors beyond our control.

As
a holding company, we have no independent operations or material assets other
than our ownership of equity interests in our subsidiaries, and we will depend
on our subsidiaries to distribute funds

39

to us so that we may pay our obligations and expenses,
including to satisfy our obligations under our debt. Our ability to make
scheduled payments on, or to refinance our obligations under, our debt will
depend on the ability of our subsidiaries to make distributions and dividends
to us, which, in turn, will depend on their operating results, cash
requirements and financial condition, general business conditions, and any
legal and regulatory restrictions on the payment of dividends to which they may
be subject, many of which may be beyond our control, and as described below.
The payment of ordinary and extraordinary dividends by our subsidiaries that
are regulated as insurance, home warranty, service contract or similar
companies is subject to applicable state law limitations. If we cannot receive
sufficient distributions from our subsidiaries, we may not be able to meet our
obligations to fund general corporate expenses or service our debt obligations.

If
our cash flow and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay capital expenditures, sell
assets, seek to obtain additional equity capital or restructure our debt. In
the future, our cash flow and capital resources may not be sufficient for
payments of interest on and principal of our debt, and such alternative
measures may not be successful and may not permit us to meet our scheduled debt
service obligations.

The
Revolving Credit Facility will mature in 2013 and the Term Loan Facilities will
mature in 2014. We cannot assure you that we will be able to refinance any of
our debt or obtain additional financing, particularly because of our
anticipated high levels of debt and the debt incurrence restrictions imposed by
the agreements governing our debt, as well as prevailing market conditions. In
the absence of such operating results and resources, we could face substantial
liquidity problems and might be required to dispose of material assets or
operations to meet our debt service and other obligations. The agreements
governing our indebtedness restrict our ability to dispose of assets and use
the proceeds from any such dispositions. We cannot assure you we will be able
to consummate those sales, or if we do, what the timing of the sales will be or
whether the proceeds that we realize will be adequate to meet debt service
obligations when due.

Increases in
interest rates would increase the cost of
servicing our debt and could reduce our profitability.

A
significant portion of our outstanding debt, including under the Credit
Facilities, will bear interest at variable rates. As a result, increases in
interest rates, whether because of an increase in market interest rates or a
decrease in our creditworthiness, would increase the cost of servicing our debt
and could materially reduce our profitability and cash flows. Each one
percentage point change in interest rates would result in a approximately $21 million
change in the annual interest expense on our Term Loan Facilities after
considering the benefit of the interest rate swaps into which we have entered.
Assuming all revolving loans were fully drawn, each one percentage point change
in interest rates would result in a $5 million change in annual interest
expense on our Revolving Credit Facility. In addition, the Interim Loan Facility provides for floating rates and automatic step ups in rates up to a
maximum rate. The maximum rate would provide for an increase in interest
expense compared to current rates of approximately $11 million on an annual
basis. We are also exposed to increases in interest rates in respect of our
floating rate operating leases, and a one percentage point change in interest
rates would result in an approximately $3 million change in annual rent
expense in respect of such operating leases. The impact of increases in
interest rates could be more significant for us than it would be for some other
companies because of our substantial debt and floating rate operating leases.

Weather
conditions and seasonality affect the demand
for our services and our results of operations.

The
demand for our services and our results of operations are affected by weather
conditions and by the seasonal nature of our lawn care and landscape maintenance
services, termite and pest control services, home warranty and home inspection
services, and disaster restoration services. For example, in our markets that
do not have a year-round growing season, the demand for our lawn care and
landscape maintenance services decreases during the winter months. Droughts and
late spring or fall snow storms can adversely

40

impact the demand for lawn care and landscape
maintenance services; above normal temperatures can result in increased service
calls in the home warranty business; and cooler temperatures can impede the
development of the termite swarm and lead to lower demand for our termite
services. For instance, in the first quarter of 2007, results in our TruGreen
LawnCare segment were adversely impacted by late first quarter snowfalls in the
Midwest and Northeast, revenue from termite completions declined in our
Terminix segment as termite swarm activity was negatively impacted by cooler
than normal weather conditions, and InStar was negatively impacted by a substantially
lower volume of hurricane-related work.

Our markets are
highly competitive. Competition could
reduce our market share and adversely impact our results of operations.

We
operate in highly competitive markets. Changes in the source and intensity of
competition in the markets served by us impact the demand for our services and
may result in additional pricing pressures. For example, if national
home-improvement retailers were to enter into our service lines, such new
entrants could adversely affect the competitive landscape for our services and
impact our financial performance. The relatively low capital cost of entry to
certain of our businesses has led to strong competitive markets, including
regional and local owner-operated companies. Regional and local competitors
operating in a limited geographic area may have lower labor, benefits and
overhead costs. The principal methods of competition in our businesses include
name recognition, quality and speed of service, pricing, customer satisfaction
and reputation. No assurance can be given that we will be able to compete
successfully against current or future competitors and that the competitive
pressures that we face will not result in reduced market share or negatively
impact our financial performance.

Increases
in fuel prices and other operating costs adversely affect our results of
operations.

Our
financial performance is affected by the level of our operating expenses, such
as fuel, wages and salaries, employee benefits, health care, vehicle,
self-insurance costs and other insurance premiums. In particular, our financial
performance is adversely affected by increases in these operating costs. In
recent years, fuel prices have fluctuated widely and have generally increased,
including sharp increases in 2006 and 2007. These fuel price increases raise
our costs of operating vehicles and equipment. Fuel price increases can also
result in increases in the cost of fertilizer, chemicals and other materials
used in our business. We cannot predict the extent to which we may experience
future increases in fuel costs and other operating costs. In the first half of
2007, our cost of services rendered and products sold increased in part due to
increased health benefit and fuel costs throughout the Company. To the extent
such cost increases occur, we may not be able to fully pass these increased
costs through to our existing and prospective customers, and the rates we pay
to our subcontractors may increase, any of which could have a material adverse
impact on our operating results. With respect to fuel, our fleet, which
consumes roughly 30 million gallons annually, has been negatively impacted
by significant increases in fuel prices. Each year, we hedge approximately two-thirds
of our estimated annual fuel usage. Fuel costs, even after the benefits of
related hedges, increased approximately $13 million pretax in 2006. Based
upon the hedges we have executed for 2007, as well as current Department of
Energy price forecasts, we would again expect an incremental adverse impact in
2007.

Our future
success depends on our ability to attract
and retain trained workers.

Our
future success and financial performance depends substantially on our ability
to attract, retain and train workers. Our ability to expand our operations is
in part impacted by our ability to increase our labor force. In the event of a
labor shortage, we could experience difficulty in delivering our services in a
high-quality or timely manner and could be forced to increase wages in order to
attract and retain employees, which would result in higher operating costs and
reduced profitability.

We may not
successfully implement our business
strategies or realize all of our expected cost savings.

41

We
may not be able to fully implement our business strategies or realize, in whole
or in part within the time frames anticipated, the anticipated benefits of our
various initiatives, such as our Lawn Quality Audit program and our agreement with
Realogy Corporation, or our expected cost savings and efficiency improvements,
including those related to Project Accelerate. Our various business strategies
and initiatives, including our productivity and customer retention initiatives,
are subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. We expect to incur certain
costs to achieve our expected cost savings and efficiency improvements. These
costs may turn out to be substantially higher than we currently estimate, and
we may not fully achieve our expected cost savings and efficiency improvements.
Our ability to successfully realize cost savings and the timing of any
realization may be affected by factors such as the need to ensure continuity in
our operations, contracts, regulations and/or statutes governing
employee-employer relationships, our ability to renegotiate contracts or find
alternative suppliers and other factors. Our business strategy may also change
from time to time. As a result, we may not be able to achieve our expected
results of operations.

Changes in
general economic conditions, especially as
they may affect home resales or consumer confidence or spending levels. Public
perceptions that our products and services are not environmentally friendly or
safe may adversely affect the demand for our services.

Changes
in general economic conditions and consumer confidence affect the demand for
our services. Unfavorable general economic conditions, including rising fuel
prices, changes in interest rates, softening of the home resale market,
increases in home foreclosures and increases in unemployment rates, could
reduce consumer confidence and related spending levels and, in turn, reduce the
demand for our services. For example, in our AHS segment, that portion of total
unit sales that are derived from the real estate resale channel were down 9% in
2006, due to a pervasive weakening in the home resale market. These factors
could also negatively impact the timing or the ultimate collection of accounts
receivable, which would negatively impact our operating revenue and
profitability.

In
providing our services, we use, among other things, fertilizers, herbicides and
pesticides. Public perception that our products and services are not
environmentally friendly or safe, whether justified or not, could lead to
reduced demand for our services, impair our reputation, involve us in
litigation, damage our brand names and otherwise have a material adverse effect
on our business, financial condition and results of operations.

Changes in the
types or mix of our service offerings
could affect our financial performance.

Our
financial performance is affected by changes in the types or mix of services we
offer our customers. For example, when Terminix transitioned from offering
primarily bait termite services to providing both liquid and bait termite
services, this transition required the purchase of additional equipment and
additional training for our associates. The bait and termite service lines also
have different price points (for both the initial treatment and for renewals)
different ongoing service obligations and different revenue recognition
policies. These changes in mix can also affect the timing of our revenues, as,
for example, when the switch to a new bait product in early 2005 allowed us to
recognize revenue from the use of bait termite applications more quickly and
thereby reduced deferrals of revenue relating to such applications to future
periods. An unsuccessful rollout or adjustment of our service offerings could
have a material adverse effect on our financial performance.

Government laws
and regulations applicable to our
businesses could increase our legal and regulatory expenses and affect our
financial performance.

Our
businesses are subject to various federal, state and local laws and
regulations. These federal and state laws include laws relating to consumer
protection, wage and hour restrictions, the employment of immigrants, permit
and licensing requirements, workers safety, the environment, insurance and
home warranty, employee benefits, telemarketing, the application of
fertilizers, herbicides, pesticides and other chemicals, noise and air pollution
from power equipment and local regulations regarding water management

42

techniques. It is difficult to predict the future
impact of the broad and expanding legislative and regulatory requirements
affecting our businesses. The laws and regulations applicable to our businesses
will likely change in the future and affect our operations and financial
performance. In addition, if we were to fail to comply with any applicable law
or regulation, we could be subject to substantial fines or damages, be involved
in litigation and suffer the loss of licenses or penalties that may affect how
our business is operated, which, in turn, would have a material adverse effect
on our business, financial condition and results of operations.

The loss of the
services of our skilled employees and
senior functional management personnel, including as a result of the
consolidation of our corporate offices, could adversely affect our financial
performance.

Our
future success and financial performance depends substantially on our ability
to attract and retain skilled employees and executives. On October 30,
2006, we announced that we will consolidate our Downers Grove, Illinois corporate headquarters
into our operations support center in Memphis, Tennessee. Our Downers Grove office
(which had approximately 170 employees at the time of such announcement) will
be closed, with the transition to Memphis scheduled to be substantially
completed by November 2007. The vast majority of our Downers Grove
employees, including senior management executives in functional areas such as
accounting, finance, tax, marketing, information technology and legal, will not
be relocating to Memphis. The senior executives of our business units are
already based in Memphis. We could experience difficulty in immediately filling
the resulting job vacancies with candidates with equivalent skills or
experience at acceptable salaries, or effectively training and transitioning
the new employees, which could affect our success and financial performance
until replacements are hired and trained.

Reductions in the
estimated recoverable amounts of
receivables related to our hurricane disaster recovery work could negatively
impact our financial performance.

InStars
gross accounts receivable at June 30, 2007 totaled approximately
$49 million and included hurricane disaster recovery work performed in
2005 and 2006 in New Orleans, southern Florida and other hurricane-affected
areas. We have accounts receivable from customers who were insured by a family
of insurance companies in Florida that have become insolvent and whose claims
are now being administered by the Florida Insurance Guaranty Association
(FIGA). We expect that collection of certain of InStars receivables,
potentially including some of those administered by FIGA, will be significantly
delayed and require or involve legal action. While InStar has a history of
recovering amounts related to its disaster recovery projects, the current
circumstances increase the uncertainties in estimating the amounts recoverable
on certain projects. The consolidated allowance for doubtful accounts at June
30, 2007 included approximately $8 million related to InStars accounts
receivable. Such allowance represents managements best estimate of the amounts
that will not be collected. If we ultimately recover amounts significantly less
than our estimates for such accounts receivable, our operating profitability
could be adversely impacted.

Compliance with
our subsidiarys environmental plan
and the costs and effects of legal or administrative proceedings could
adversely impact our business and financial results.

On
November 8, 2006, InStar entered into a plea agreement with the United
States Attorneys Office for the Southern District of Florida requiring that
InStar implement an environmental compliance plan, pay a fine of
$0.5 million for each count, for a total of $1.0 million, and make a
contribution of $2.0 million to the Florida Environmental Task Force Trust
Fund, in each case relating to conduct that occurred prior to our acquisition
of InStar. The plea agreement entered into between InStar and the United States
Attorneys Office for the Southern District of Florida will require ongoing
monitoring and compliance by InStar for up to five years, violation of which
could potentially result in further fines, loss of licenses, loss of certain
federal grants and procurement contracts, and possible criminal sanctions. As
part of InStars plea agreement with the United States Attorneys Office, InStar
has agreed to implement a comprehensive environmental compliance plan. The
environmental compliance plan requires, among other things, mandatory training
for all InStar employees on the proper identification, handling and management
of

43

hazardous substances, internal monitoring and audits
of the compliance plan, and third-party auditing and reporting of compliance
with the plan. If the compliance plan is not fulfilled and the plea agreement
is violated, potential risks to us include additional and substantial fines,
expanded investigation and prosecution by the United States Attorneys Office,
loss of certain key contractor licenses currently held by InStar, loss of
federal grants and procurement contracts for InStar, negative media exposure
and damage to our reputation that could result in loss of business for InStar
and other of our business units, and possible criminal sanctions.

Laws and
regulations regarding the use of pesticides
and fertilizers, as well as other environmental laws and regulations, could
result in significant costs that adversely affect our operating results.

Local,
state, federal and foreign laws and regulations relating to environmental
matters affect us in several ways. In the United States, all products containing
pesticides must be registered with the U.S. Environmental Protection Agency
(EPA) (and similar state agencies) before they can be sold. The failure to
obtain or the cancellation of any such registration could have an adverse
effect on our business, the severity of which would depend on the products
involved, whether other products could be substituted and whether our
competitors were similarly affected. The pesticides we use are manufactured by
independent third parties and are evaluated by the EPA as part of its ongoing
exposure risk assessment. The EPA may decide that a pesticide we use will be
limited or will not be re-registered for use in the United States. We cannot
predict the outcome or the severity of the effect of the EPAs continuing evaluations.

In
addition, the use of certain pesticide and fertilizer products is regulated by
various local, state, federal and foreign environmental and public health
agencies. These regulations may require that only certified or professional
users apply the product or that certain products be used only on certain types
of locations, may require users to post notices on properties to which products
have been or will be applied, may require notification to individuals in the
vicinity that products will be applied in the future or may ban the use of
certain products. Even if we are able to comply with all such regulations and
obtain all necessary registrations, we cannot assure you that our products,
particularly pesticide products, will not cause injury to the environment or to
people under all circumstances. The costs of compliance, remediation or
products liability could materially affect our future operating results.

Local,
state, federal and foreign agencies regulate the disposal, handling and storage
of waste, air and water discharges from our facilities and the investigation
and clean-up of contaminated sites. We could incur significant costs, including
clean-up costs, fines and civil or criminal sanctions and claims by third
parties for property damage and personal injury, as a result of violations of
or liabilities under these laws and regulations. If there is a significant
change in the facts and circumstances surrounding the assumptions upon which we
operate or if we are found not to be in substantial compliance with applicable
environmental and public health laws and regulations, it could have a material
impact on future environmental capital expenditures and other environmental
expenses and our results of operations, financial position and cash flows. In
addition, potentially significant expenditures could be required to comply with
environmental laws and regulations, including requirements that may be adopted
or imposed in the future.

We may not be
able to adequately protect our
intellectual property and other proprietary rights that are material to our
business.

Our ability
to compete effectively depends in part on our rights to trademarks and other
intellectual property rights we own or license, particularly our Terminix®, TruGreen®, Merry
Maids®,
ServiceMaster Clean®, American Home Shield®, AmeriSpec®, InStar®, Furniture
Medic®
and ServiceMaster® brand names.
We have not sought to register all of our trademarks either in the United
States or in every country in which they are used. Furthermore, because of the
differences in foreign trademark, patent and other intellectual property or
proprietary rights laws, we may not receive the same protection in foreign
countries as we would in the United States. If we are unable to protect our
proprietary information and brand names, we could suffer a material adverse
effect on our business, financial condition or results of operations.

44

Litigation
may be necessary to enforce our intellectual property rights and protect our
proprietary information, or to defend against claims by third parties that our
products or services infringe their intellectual property rights. Any litigation
or claims brought by or against us could result in substantial costs and
diversion of our resources. A successful claim of trademark, patent or other
intellectual property infringement against us could subject us to damages or
prevent us from providing certain services, which could have a material adverse
effect on our business, financial condition or results of operations.

Disruptions in
our information technology systems
could limit our ability to effectively monitor, operate and control our operations
and adversely affect our operating results.

Our
information technology systems facilitate our ability to monitor, operate and
control our operations. While we have disaster recovery plans in place, any
disruption in these plans or the failure of these plans to operate as expected
could, depending on the magnitude of the problem, adversely affect our
operating results by limiting our capacity to monitor, operate and control our
operations effectively. In addition, because our systems contain information
about individuals and businesses, our failure to maintain the security of the
data we hold, whether the result of our own error or the malfeasance or errors
of others, could harm our reputation or give rise to legal liabilities leading
to lower revenues, increased costs and other material adverse effects on our
results of operations.

Future
acquisitions affect our financial performance.

We
plan to continue to pursue opportunities to expand through selective
acquisitions, focusing primarily on tuck-in acquisitions in existing service
lines. Our ability to continue to make acquisitions at reasonable prices and to
integrate acquired businesses are important factors in our future growth. We
cannot assure that we will be able to manage or integrate acquired businesses
successfully. Any inability on our part to consolidate and manage growth from
acquired businesses could have an adverse effect on our financial performance,
and there can be no assurance that any acquisition that we make in the future
will provide us with the benefits that were anticipated when entering into such
acquisition. The process of integrating an acquired business may create
unforeseen difficulties and expenses, including the diversion of resources in integrating
new businesses, technologies, products, personnel or systems; the inability to
retain employees, customers and suppliers from businesses we acquire; the
assumption of actual or contingent liabilities; write-offs or impairment
charges relating to goodwill and other intangible assets from acquisitions; and
unanticipated or unknown liabilities relating to acquired businesses.

We are indirectly
owned and controlled by the Equity
Sponsors, and their interests as equity holders may conflict with holders of
our debt.

After
the Merger, we are indirectly owned and controlled by the Equity Sponsors, who
will have the ability to control our policy and operations. The directors
appointed by affiliates of the Equity Sponsors are able to make decisions
affecting our capital structure, including decisions to issue additional
capital stock and incur additional debt. The interests of the Equity Sponsors
may not in all cases be aligned with the interests of the holders of our debt.
For example, if we encounter financial difficulties or are unable to pay our
debts as they mature, the interests of our Equity Sponsors might conflict with
the interests of holders of our debt. In addition, our Equity Sponsors may have
an interest in pursuing acquisitions, divestitures, financings or other
transactions that, in their judgment, could enhance their equity investments,
even though such transaction might involve risks to holders of our debt.
Furthermore, the Equity Sponsors may in the future own businesses that directly
or indirectly compete with us. One or more of the Equity Sponsors also may
pursue acquisition opportunities that may be complementary to our business, and
as a result, those acquisition opportunities may not be available to us.

45

Item
2: Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchases:

In February
2006, the Board of Directors authorized $250 million for share repurchases. As
presented in the following table, there were no share repurchases of the
Companys common stock for the three months ended June 30, 2007.

With the
completion of the merger agreement on July 24, 2007, ServiceMaster common stock
is no longer traded on the New York Stock Exchange.

Total Number
 of Shares
 Purchased

Average Price
 Paid per
 Share

Total
 Number
 of Shares
 Purchased as
 Part of Publicly
 Announced
 Plan

Approximate
 Dollar Value
 of Shares that
 May Yet be
 Purchased
 Under the
 PlanApril 1,
 2007 throughApril 30,
 2007





$




$
179,000,000May 1, 2007
 throughMay 31, 2007





$




$
179,000,000June 1, 2007
 throughJune 30,
 2007





$




$
179,000,000Total





$


Item 4: Submission of Matters to a Vote of
Security Holders

A special
meeting of stockholders was held on June 28, 2007 to vote on two matters
related to ServiceMasters merger with an indirect wholly-owned subsidiary of
ServiceMaster Global Holdings, Inc. (f/k/a CDRSVM Topco, Inc.).

The first
matter was to consider and vote upon a proposal to adopt the agreement and plan
of merger, dated as of March 18, 2007, among ServiceMaster, CDRSVM Topco, Inc.
and CDRSVM Acquisition Co., Inc. which provided for the merger of CDRSVM
Acquisition Co. Inc., an indirect wholly-owned subsidiary of CDRSVM Topco,
Inc., with and into ServiceMaster, with ServiceMaster continuing as the
surviving corporation, and the conversion of each outstanding share of common
stock of ServiceMaster into the right to receive $15.625 in cash.

The second
matter was to consider and vote upon a proposal to adjourn the special meeting
if necessary or appropriate to permit further solicitation of proxies if there
are not sufficient notes at the time of the special meeting to approve the
agreement and plan of merger.

The first
proposal passed with 195,232,879 votes for the proposal, 2,021,679 votes
against the proposal and 867,862 votes abstaining.

46

The second
proposal passed with 183,989,035 votes for the proposal, 11,762,965 votes
against the proposal and 2,372,418 votes abstaining.

Item 6: Exhibits

Exhibit No.

Description of Exhibit31.1

Certification of Chief Executive Officer Pursuant to
Rule 13a  14(a)
 or 15d  14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
 of 200231.2

Certification of Chief Financial Officer Pursuant to
Rule 13a  14(a)
 or 15d  14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
 of 200232.1

Certification of Chief Executive Officer Pursuant to
Section 1350 of
 Chapter 63 of Title 18 of the United States Code, as adopted pursuant to
 Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Chief Financial Officer Pursuant to
Section 1350 of
 Chapter 63 of Title 18 of the United States Code, as adopted pursuant to
 Section 906 of the Sarbanes-Oxley Act of 200247

SIGNATURE

Pursuant to
the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

Date: August
 9, 2007THE
 SERVICEMASTER COMPANY
 (Registrant)By:
/s/ Ernest
 J. MrozekErnest J.
 MrozekVice
 Chairman and Chief Financial Officer48